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AOMR Angel Oak Mortgage

Filed: 10 Mar 21, 7:00pm

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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS

Table of Contents

The registrant is submitting this amended draft registration statement confidentially as an "emerging growth company" pursuant to Section 6(e) of the Securities Act of 1933, as amended.
As submitted confidentially to the Securities and Exchange Commission on March 11, 2021

Registration Statement No. 333-              

 

United States
Securities and Exchange Commission
Washington, D.C. 20549

Form S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

Angel Oak Mortgage, Inc.
(Exact Name of Registrant as Specified in Its Governing Instruments)

Angel Oak Mortgage, Inc.
3344 Peachtree Road, Suite 1725
Atlanta, Georgia 30326
(404) 953-4900

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)

Dory Black
Angel Oak Mortgage, Inc.
3344 Peachtree Road NW, Suite 1725
Atlanta, Georgia 30326
(404) 953-4900

(Name, Address, Including Zip Code and Telephone Number, Including Area Code, of Agent for Service)

Copies to:

J. Gerard Cummins
Sidley Austin LLP
787 Seventh Avenue
New York, New York 10019
Tel (212) 839-5300
Fax (212) 839-5599

 

Andrew S. Epstein
Jason D. Myers
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
Tel (212) 878-8000
Fax (212) 878-8375

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the registration statement becomes effective.

            If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:    o

            If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

            If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

            If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

            If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.    o

            Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer ý Smaller reporting company o

Emerging growth company ý

            If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ý



CALCULATION OF REGISTRATION FEE

    
 
Title of securities
to be registered

 Proposed maximum
aggregate offering
price(1)(2)

 Amount of
registration fee(1)(2)

 

Common Stock, $0.01 par value per share

 $              $             

 

(1)
Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(2)
Includes shares of common stock subject to the underwriters' over-allotment option.

            The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), shall determine.

   


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MARCH 11, 2021

Prospectus  

Shares

GRAPHIC

Angel Oak Mortgage, Inc.

Common Stock


           This is our initial public offering. We are offering                 shares of our common stock, $0.01 par value per share (our "common stock"). We expect that the initial public offering price will be between $             and $             per share. Prior to this offering, there has been no public market for shares of our common stock. We intend to apply to have our common stock listed on the New York Stock Exchange (the "NYSE") under the symbol "AOMR."

           We are a real estate finance company focused on acquiring and investing in "non-qualified" mortgage loans ("non-QM loans") and other mortgage-related assets in the U.S. mortgage market. We are externally managed by Falcons I, LLC, an affiliate of Angel Oak Capital Advisors, LLC. Our objective is to generate attractive risk-adjusted returns for our stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. We commenced operations in September 2018 and are organized as a Maryland corporation. As of December 31, 2020, we had total assets of approximately $509.7 million, including an approximate $308.2 million portfolio of non-QM loans and other target assets.

           We have elected to be taxed as a real estate investment trust (a "REIT") for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. Subject to certain exceptions, our charter provides that no person may beneficially or constructively own shares of common stock in excess of 9.8% in value or in number of shares, whichever is more restrictive. In addition, our charter contains various other restrictions on the ownership and transfer of shares of our stock. See "Description of Stock — Restrictions on Ownership and Transfer."

           We are an "emerging growth company" as defined under the U.S. federal securities laws and, as such, will be subject to reduced public company reporting requirements for this prospectus and future filings. See "Summary — Implications of Being an Emerging Growth Company."

           See "Risk Factors" beginning on page 47 to read about certain factors you should consider before making a decision to invest in our common stock.

 
 Per share Total 

Initial public offering price

 $              $              

Underwriting discounts and commissions(1)

 $              $              

Proceeds, before expenses, to us(2)

 $              $              

(1)
Angel Oak Capital Advisors, LLC has agreed to pay the underwriting discounts and commissions in connection with this offering. Please see the section entitled "Underwriting" for a complete description of the compensation payable to the underwriters.

(2)
Angel Oak Capital Advisors, LLC has agreed to pay all of our expenses incurred in connection with this offering. Please see the section entitled "Underwriting" for more information.

           Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

           The underwriters have the option to purchase up to an additional                 shares of our common stock from us at the initial public offering price less the underwriting discounts and commissions, exercisable at any time or from time to time within 30 days after the date of this prospectus, solely to cover over-allotments, if any.

           The underwriters expect to deliver the shares of our common stock on or about                          , 2021.



Joint Book-Running Managers

Wells Fargo Securities BofA Securities Morgan Stanley UBS Investment Bank

Book-Runner

B. Riley Securities

Co-Managers

Nomura Oppenheimer & Co.



   

Prospectus dated              , 2021



TABLE OF CONTENTS

 
 Page

GLOSSARY

 iii

SUMMARY

 1

THE OFFERING

 39

RISK FACTORS

 47

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 119

USE OF PROCEEDS

 121

DILUTION

 122

DISTRIBUTION POLICY

 124

CAPITALIZATION

 125

SELECTED FINANCIAL INFORMATION

 126

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 131

BUSINESS

 170

OUR STRUCTURE AND FORMATION

 212

MANAGEMENT

 216

OUR MANAGER AND THE MANAGEMENT AGREEMENT

 230

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 241

PRINCIPAL STOCKHOLDERS

 247

DESCRIPTION OF STOCK

 251

SHARES ELIGIBLE FOR FUTURE SALE

 257

OUR OPERATING PARTNERSHIP AND THE PARTNERSHIP AGREEMENT

 260

CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS

 265

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 273

ERISA CONSIDERATIONS

 297

UNDERWRITING

 300

LEGAL MATTERS

 305

EXPERTS

 305

WHERE YOU CAN FIND MORE INFORMATION

 305

INDEX TO FINANCIAL STATEMENTS

 F-1

          Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. You should assume that the information appearing in this prospectus or in any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in such documents. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.


          Unless the context otherwise requires or indicates, the terms "we," "us," "our" and "our company" refer to Angel Oak Mortgage, Inc., a Maryland corporation, our operating partnership and their respective subsidiaries (except that, prior to the completion of this offering and our formation transactions (as described below), unless the context otherwise requires or indicates, "we," "us," "our" and "our company"

i


may also refer to Angel Oak Mortgage Fund); the term "our operating partnership" means Angel Oak Mortgage Operating Partnership, LP, a Delaware limited partnership, through which we hold substantially all of our assets and conduct our operations; the term "Angel Oak Mortgage Fund" refers to Angel Oak Mortgage Fund, LP, a private investment fund formed in February 2018 that, prior to the completion of this offering and our formation transactions, owns all of the common stock of Angel Oak Mortgage, Inc.; the term "Manager" refers to Falcons I, LLC, our external manager; the term "Angel Oak Companies" refers to Angel Oak Companies, LP; the term "Angel Oak Capital" refers to Angel Oak Capital Advisors, LLC; the term "Angel Oak Mortgage Lending" refers collectively to Angel Oak Mortgage Solutions, Angel Oak Home Loans and Angel Oak Commercial Lending; the term "Angel Oak Mortgage Solutions" refers to Angel Oak Mortgage Solutions LLC; the term "Angel Oak Home Loans" refers to Angel Oak Home Loans LLC; the term "Angel Oak Commercial Lending" refers to Angel Oak Commercial Lending, LLC, Angel Oak Prime Bridge, Angel Oak Commercial Bridge and Cherrywood Mortgage; the term "Angel Oak Prime Bridge" refers to Angel Oak Prime Bridge, LLC; the term "Angel Oak Commercial Bridge" refers to Angel Oak Commercial Bridge, LLC; and the term "Cherrywood Mortgage" refers to Cherrywood Mortgage, LLC.

          The term "Angel Oak" refers collectively to Angel Oak Capital and its affiliates, including our Manager, Angel Oak Companies and Angel Oak Mortgage Lending; and the term "AOMT" refers to Angel Oak Mortgage Trust I, LLC, Angel Oak's securitization platform, including its subsidiaries and affiliates. In certain instances, references to our Manager and services to be provided to us by our Manager may also include services provided by Angel Oak Capital or its affiliates from time to time.

          The term "stock" refers, unless the context requires otherwise, to all classes or series of stock of Angel Oak Mortgage, Inc. The term "OP units" refers to units of limited partnership interest in our operating partnership, which are redeemable beginning six months after the issuance of such OP units for cash, based upon the value of an equivalent number of shares of our common stock at the time of the redemption, or, at our election, shares of our common stock on a one-for-one basis, subject to certain adjustments and the restrictions on ownership and transfer of our stock set forth in our charter and described under the section entitled "Description of Stock — Restrictions on Ownership and Transfer."

Market Data

          We use market data and industry forecasts and projections throughout this prospectus, and in particular in the sections entitled "Summary" and "Business." Such market data and industry forecasts and projections have been taken from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources they believe to be reliable, but we have not investigated or verified the accuracy and completeness of such information. Forecasts, projections and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding our forward-looking statements in this prospectus. See "Special Note Regarding Forward-Looking Statements."

Trademarks

          This prospectus includes our trademarks and trademarks of Angel Oak Companies which are protected under applicable intellectual property laws, and are our property and the property of Angel Oak Companies. Solely for convenience, trademarks, service marks and trade names referred to in this prospectus may appear without the ® or ™, but such references are not intended to indicate, in any way, that we or Angel Oak Companies will not assert, to the fullest extent under applicable law, our and its rights to these trademarks, service marks and trade names.

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GLOSSARY

          This glossary highlights some of the industry and other terms that we use elsewhere in this prospectus and is not a complete list of all the defined terms used herein.

          "ABS" means securities collateralized by a pool of assets, such as loans, credit card debt, royalties or receivables, but typically excluding mortgages.

          "Agency" means a U.S. Government agency, such as Ginnie Mae, or a federally chartered corporation, such as Fannie Mae or Freddie Mac, which guarantees payments of principal and interest on MBS.

          "Agency RMBS" means residential mortgage-backed securities for which an Agency guarantees payments of principal and interest on the securities.

          "Alt-A mortgage loans" mean residential mortgage loans made to borrowers whose qualifying mortgage characteristics do not conform to Agency underwriting guidelines, but whose borrower characteristics may. Generally, Alt-A mortgage loans allow homeowners to qualify for a mortgage loan with reduced or alternate forms of documentation. The credit quality of an Alt-A borrower generally exceeds the credit quality of subprime borrowers.

          "A-Note" means a senior interest in a mortgage loan secured by a first mortgage on a single large commercial property or group of related commercial properties. A-Notes have a senior right to receive interest and principal related to the mortgage loan.

          "ATR rules" means the Ability-to-Repay rules under the Truth-in-Lending Act established by the CFPB pursuant to authority granted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which rule, among other matters, requires lenders to make a reasonable and good faith determination of a borrower's ability to repay when underwriting a new mortgage, including documenting and verifying income and assets, as well as other factors.

          "B-Note" means an interest in a loan secured by a first mortgage on a single large commercial property or group of related commercial properties and that is subordinated in right of payment to an A-Note, which is a senior interest in such loan.

          "CFPB" means the Consumer Financial Protection Bureau, an agency of the U.S. Government responsible for consumer protection in the financial sector.

          "CMBS" means mortgage-backed securities that are secured by interests in a single commercial real estate loan or a pool of mortgage loans secured by commercial properties.

          "Commercial bridge loans" mean, generally, floating rate whole loans secured by first priority mortgage liens on the commercial real estate made to borrowers seeking short-term capital (typically with terms of up to five years) to be used in the acquisition, construction or redevelopment of commercial properties. This type of bridge financing enables the borrower to secure short-term financing while improving the commercial property and avoid burdening it with restrictive long-term debt.

          "Commercial real estate loans" mean, with respect to our target assets, senior mortgage loans, commercial bridge loans, mezzanine loans, B-Notes, construction loans and small balance commercial real estate loans.

          "Conforming residential mortgage loans" mean residential mortgage loans that conform to the underwriting guidelines of a GSE.

          "Construction loans" mean short-term mortgage loans secured by first priority mortgage liens on the real estate used to finance the cost of construction or rehabilitation of commercial properties, and are typically disbursed over time as construction progresses.

          "Consumer loans" mean loans made to individuals for personal, family or household purposes (such as auto loans, credit cards and student loans).

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          "CRT securities" mean risk-sharing instruments issued by GSEs, or similarly structured transactions arranged by third-party market participants, that transfer a portion of the risk associated with credit losses within pools of conventional residential mortgage loans to investors such as us. Unlike Agency RMBS, full repayment of the original principal balance of CRT securities is not guaranteed by a GSE; rather, "credit risk transfer" is achieved by writing down the outstanding principal balance of the CRT securities if credit losses on the related pool of loans exceed certain thresholds. By reducing the amount that issuers are obligated to repay to holders of CRT securities, the issuers of CRT securities are able to offset credit losses on the related pool of loans.

          "DTI" means debt-to-income ratio, which is calculated as a borrower's monthly debt payments, divided by the borrower's monthly gross income.

          "EU Securitization Rules" mean the European Union legislation that requires institutional investors, prior to investing in a securitization, to verify compliance with certain conditions, including that the originator, the original lender or the sponsor retains, on an ongoing basis, a material net economic interest in the relevant securitization of not less than 5% in the form of the retention of certain specified credit risk tranches or asset exposures. For more information, see "Business — Our Financing Strategies and Use of Leverage — Risk Retention."

          "Fannie Mae" means the Federal National Mortgage Association, a federally chartered corporation.

          "Freddie Mac" means the Federal Home Loan Mortgage Corporation, a federally chartered corporation.

          "Ginnie Mae" means the Government National Mortgage Association, a wholly-owned corporate instrumentality of the United States within the U.S. Department of Housing and Urban Development.

          "GSE" means a government-sponsored enterprise. When we refer to GSEs, we mean Fannie Mae or Freddie Mac.

          "Investment property loans" mean mortgage loans made on portfolios of residential rental properties.

          "Jumbo prime mortgage loans" mean residential mortgage loans that do not conform to GSE underwriting guidelines, primarily because the mortgage balance exceeds the maximum amount permitted by such underwriting guidelines.

          "LTV" means loan-to-value ratio, which is calculated for purposes of this prospectus as the outstanding principal amount of a loan plus any financing that is pari passu with or senior to such loan at the time of acquisition, divided by the applicable real estate value at acquisition of such loan. The real estate value reflects the results of third-party appraisals obtained by the selling mortgage companies prior to the loan closing.

          "MBS" means mortgage-backed securities that are secured by interests in a pool of mortgage loans secured by property.

          "Mezzanine loans" mean loans made to commercial property owners that are secured by pledges of the borrowers' ownership interests, in whole or in part, in entities that directly or indirectly own the properties, such loans being subordinate to whole loans secured by first or second mortgage liens on the properties themselves. Mezzanine loans may be structured as preferred equity investments which provide substantively the same rights for the lender but involve the lender holding actual equity interests with preferential rights over the common equity.

          "Mortgage loans" mean loans secured by real estate with a right to receive the payment of principal and interest on the loans (including servicing fees).

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          "MSRs" mean mortgage servicing rights. MSRs represent the right to service mortgage loans, which involves activities such as collecting mortgage payments, escrowing and paying taxes and insurance premiums and forwarding principal and interest payments to the mortgage lender. In return for providing these services, the holder of an MSR is entitled to receive a servicing fee, typically specified as a percentage (expressed in basis points) of the serviced loan's unpaid principal balance. An MSR is made up of two components: a basic fee and an "excess MSR." The basic fee is the amount of compensation for the performance of servicing duties (including advance obligations), and the excess MSR is the amount that exceeds the basic fee.

          "non-Agency RMBS" means RMBS that are not issued or guaranteed by an Agency or a GSE.

          "non-QM loans" mean residential mortgage loans that do not satisfy the requirements for QM loans, including "exempt loans," such as "Investor" loans made to real estate investors and originated by Angel Oak Mortgage Lending that do not need to meet the ATR rules. For more information on "Investor" loans, see "Summary — Our Strategy."

          "QM loans" mean residential mortgage loans that comply with the ATR rules and related guidelines of the CFPB.

          "Residential bridge ("fix and flip") loans" mean short-term residential mortgage loans secured by a first priority security interest in non-owner occupied single family or multi-family residences, which loans are typically used in the acquisition and re-development of the residences with a view to the borrowers selling the residences.

          "Residential mortgage loans" mean, with respect to our target assets, non-QM loans, QM loans, conforming residential mortgage loans, second lien mortgage loans, residential bridge ("fix and flip") loans, investment property loans, jumbo prime mortgage loans, Alt-A mortgage loans and subprime residential mortgage loans.

          "RMBS" means mortgage-backed securities that are secured by interests in a pool of mortgage loans secured by residential property. RMBS may be senior, subordinate, interest-only, principal-only, investment-grade, non-investment grade or unrated.

          "Second lien mortgage loans" mean residential mortgage loans that are subordinate to the primary or first lien mortgage loans on a residential property.

          "Senior mortgage loans" mean commercial real estate loans secured by first mortgage liens on commercial properties, which loans may vary in duration, may bear interest at fixed or floating rates and may amortize, and typically require balloon payments of principal at maturity.

          "Small balance commercial real estate loans" mean commercial real estate loans that typically range in original principal amounts of between $250,000 and $15 million.

          "Subprime residential mortgage loans" mean residential mortgage loans that do not conform to GSE underwriting guidelines. These lower standards permit loans to be made to borrowers having low credit scores and/or imperfect or impaired credit histories (including outstanding judgments or prior bankruptcies), loans with no income disclosure or verification and loans with high LTVs.

          "U.S. Risk Retention Rules" mean the credit risk retention rules of the Securities and Exchange Commission (the "SEC") that generally require the sponsor of asset-backed securities to retain not less than 5% of the credit risk of the assets collateralizing the issuer's securities. For more information, see "Business — Our Financing Strategies and Use of Leverage — Risk Retention."

          "UK Securitization Rules" mean the United Kingdom legislation that requires institutional investors, prior to investing in a securitization, to verify compliance with certain conditions, including that the originator, the original lender or the sponsor retains, on an ongoing basis, a material net economic interest in the relevant securitization of not less than 5% in the form of the retention of certain specified

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credit risk tranches or asset exposures. For more information, see "Business — Our Financing Strategies and Use of Leverage — Risk Retention."

          "UPB" means unpaid principal balance of a mortgage loan.

          "WAC" means weighted average coupon, which is the weighted average interest rate of the mortgage loans underlying the indicated investment.

          "Whole loans" mean direct investments in whole residential mortgage loans, as opposed to investments in other structured products that are backed by such loans.

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SUMMARY

          This summary highlights information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that you should consider before making a decision to invest in our common stock. You should read carefully the more detailed information set forth under "Risk Factors," including risks relating to the outbreak and impact of the novel coronavirus ("COVID-19") on the U.S. and global economies and our business, and the other information included in this prospectus. For a description of certain industry terms used in this prospectus, see "Glossary" beginning on page (iii).

          Unless the context otherwise requires or indicates, the information in this prospectus assumes: (1) our formation transactions (as described below) have been, or will be, completed prior to, or concurrently with, the completion of this offering; (2) the shares of our common stock sold in this offering are sold at $             per share, which is the mid-point of the price range indicated on the front cover page of this prospectus; and (3) no exercise of the underwriters' over-allotment option.

Our Company

          Angel Oak Mortgage, Inc. is a real estate finance company focused on acquiring and investing in first lien non-QM loans and other mortgage-related assets in the U.S. mortgage market. Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending, which operates through wholesale and retail channels and has a national origination footprint. We also may invest in other residential mortgage loans, RMBS and other mortgage-related assets, which, together with non-QM loans, we refer to in this prospectus as our target assets. Further, we also may identify and acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases. Our objective is to generate attractive risk-adjusted returns for our stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles.

          We commenced operations in September 2018 and have received $303 million in equity capital commitments since then. On February 5, 2020, we formed our operating partnership through which substantially all of our assets are held and substantially all of our operations are conducted, either directly or through subsidiaries. As of December 31, 2020, we had total assets of approximately $509.7 million, including an approximate $308.2 million portfolio of non-QM loans and other target assets, which were financed with several term securitizations as well as with in-place loan financing lines and repurchase facilities with a combination of global money center and large regional banks. Our portfolio consists primarily of mortgage loans and mortgage-related assets that have been underwritten in-house by Angel Oak Mortgage Lending, and are subject to Angel Oak Mortgage Lending's rigorous underwriting guidelines and procedures. As of the date of origination and deal date of each of the loans underlying our portfolio of RMBS issued in AOMT securitizations that we participated in, such loans had a weighted average FICO score of 715, a weighted average LTV of 76.4% and a weighted average down payment of approximately $100,000.

          We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. Commencing with our taxable year ended December 31, 2019, we believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code (the "Code"). Our qualification as a REIT, and maintenance of such qualification, will depend on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our stock. We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act").

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Our Manager and its Operating Platform

          We are externally managed and advised by our Manager, a registered investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and an affiliate of Angel Oak. Angel Oak is a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets. Angel Oak Capital was established in 2009 and had approximately $10.6 billion in assets under management as of December 31, 2020, across private credit strategies, multi-strategy funds, separately managed accounts and mutual funds, including $6.4 billion of mortgage-related assets. Angel Oak Mortgage Lending is a market leader in non-QM loan production and, as of December 31, 2020, had originated over $8.8 billion in total non-QM loan volume since its inception in 2011. AOMT, Angel Oak's securitization platform, is a leading programmatic issuer of non-QM securities and had issued approximately $6.9 billion in such securities through 18 rated offerings as of December 31, 2020 — making AOMT among the largest issuers of such securities since 2015. Angel Oak managed entities have retained subordinated bonds from these transactions. Angel Oak is headquartered in Atlanta and has over 650 employees across its enterprise.

          Through our relationship with our Manager, we benefit from Angel Oak's vertically integrated platform and in-house expertise, providing us with the resources that we believe are necessary to generate attractive risk-adjusted returns for our stockholders. Angel Oak Mortgage Lending provides us with proprietary access to non-QM loans, as well as transparency over the underwriting process and the ability to acquire loans with our desired credit and return profile. We believe our ability to identify and acquire target assets through the secondary market is bolstered by Angel Oak's experience in the mortgage industry and expertise in structured credit investments. In addition, we believe we have significant competitive advantages due to Angel Oak's analytical investment tools, extensive relationships in the financial community, financing and capital structuring skills, investment surveillance capabilities and operational expertise.

          Our Manager is led by a cycle-tested team of professionals, each with over 15 years of experience in the finance and mortgage business sectors, including Robert Williams, our Chief Executive Officer and the Chief Executive Officer of our Manager, Brandon Filson, our dedicated Chief Financial Officer and Treasurer, Sreeniwas Prabhu, Managing Partner and Co-Chief Executive Officer of Angel Oak Capital and the President of our Manager, Michael Fierman, the Chairman of our Board of Directors and a Managing Partner and Co-Chief Executive Officer of Angel Oak Companies, and Namit Sinha, Co-Chief Investment Officer, Private Strategies of Angel Oak. Our Manager's senior management team is supported by approximately 80 employees, across Angel Oak Capital's executive, portfolio management, capital markets, operations, risk, compliance, and sales and marketing teams. Further, our Manager benefits from access to Angel Oak Mortgage Lending's over 530 employees across its platform.

Angel Oak's Proprietary Mortgage Lending Platform

          Angel Oak operates a comprehensive mortgage lending platform that is a leading originator of non-QM loans, which provides us access to assets to pursue our strategy. The mortgage lending platform was created in 2011 and serves an integral role in Angel Oak's residential mortgage credit strategy and third-party fund complex by sourcing mortgage assets as well as allowing for transparency and control of the underwriting and origination process. Angel Oak Mortgage Lending's strategy is focused on originating high quality residential mortgage loans that are acquired by various Angel Oak managed entities, including us, creating alignment with Angel Oak and our Manager. Further, the mortgage lending platform is led by Michael Fierman, the Chairman of our Board of Directors and a Managing Partner and Co-Chief Executive Officer of Angel Oak Companies.

          Through our Manager's relationship with Angel Oak Mortgage Lending, we are able to primarily utilize an "originator model" of sourcing loans, which we believe provides tangible value and differentiation compared to an "aggregator model" that is dependent on third-party origination and underwriting. The originator model allows for verification of the credit underwriting process instead of outsourcing

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this critical function, and provides the ability to create a desired credit and return profile at the source. This model provides for the ability to quickly adapt and customize the collateral profile depending on market conditions. Further, we believe this strategy creates more durable access to non-QM loan volume since it does not rely on third-party originators to create loans. We believe that the originator model has been well-received by market participants, including rating agencies and senior bond buyers of securitizations sponsored by Angel Oak managed entities, and it demonstrates a strong alignment of interests with regard to credit quality given the retention of junior bonds by Angel Oak managed entities. Furthermore, we believe that our access to Angel Oak Mortgage Lending's origination platform also differentiates us among most other U.S. public mortgage REIT peers by providing us with the ability to pursue our primary strategy focused on non-QM loans.

          Angel Oak Mortgage Lending originated approximately $3.3 billion and $1.5 billion in non-QM loans for the years ended December 31, 2019 and 2020, respectively. The mortgage lending platform has a diverse product offering of non-QM loans as well as a national origination footprint through its wholesale and retail channels, as described below.

    Wholesale Channel (Angel Oak Mortgage Solutions — Founded in 2014)

    "Business-to-business" strategy that sources loans through a network of approximately 3,600 approved brokers, representing approximately 20% of the estimated 18,000 mortgage brokers in the United States, consisting of mortgage banks, credit unions, banks, and other entities throughout the country that refer loans to Angel Oak Mortgage Solutions. Employs state-of-the-art technology to streamline operations and deliver seamless and efficient service to partners.

    Represented approximately 91% and 92% of Angel Oak Mortgage Lending's non-QM loan volume for the years ended December 31, 2019 and 2020, respectively.

    Retail Channel (Angel Oak Home Loans — Founded in 2011)

    "Direct consumer access" strategy that utilizes a traditional retail model focused on home purchase lending business through its 37 local offices in various states throughout the United States. Provides licensed mortgage advisors with the tools necessary to build and sustain a loyal referral network, which typically consists of realtors, builders, financial planners, certified public accountants, clients, family members and friends.

    Represented approximately 9% and 8% of Angel Oak Mortgage Lending's non-QM loan volume for the years ended December 31, 2019 and 2020, respectively.

Angel Oak Mortgage Lending's Platform Would be Difficult to Replicate

    Substantial capital investment and significant resources have been devoted to the mortgage lending platform since 2011, building a leading non-QM lender in the United States.

    We believe that Angel Oak Mortgage Lending's experience and reputation in the industry create strong relationships with its mortgage broker clients, which are the primary source of non-QM loan opportunities. These clients generally originate a small percentage of their total volume in non-QM loans, and therefore often seek a partner with strong customer service levels that can seamlessly close loans. These client relationships have been built over years and span the clients' senior management teams, loan officers and support staffs.

    Relationships with a network of brokers provide a continual flow of loans on a programmatic basis, which we believe compares favorably to many of our competitors that do not have the operating infrastructure to source loans in the same manner. Instead, many of our competitors purchase loans on a "bulk" or "mini-bulk" basis, which is subject to inconsistent loan flow and credit profiles.

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    We believe that Angel Oak Mortgage Lending's "boots on the ground" in its retail channel provides us with deep insight into residential mortgage lending as well as the ability to identify trends in real time.

Our Strategic Affiliation with Angel Oak

Angel Oak Investment Creates a Strong Alignment of Interests

          Angel Oak and its leadership team have committed substantial time and resources in developing our platform and have taken steps to limit stockholder dilution related to this offering. Since 2017, Angel Oak has hired three employees to solely focus on managing our platform, contributed $1.0 million in seed capital, as well as undertaken an 18-month private capital raise that culminated in anchor investments from three institutional investors. In addition, Angel Oak Capital has agreed to pay all of our expenses incurred in connection with this offering, including the underwriting discounts and commissions payable to the underwriters in this offering, eliminating stockholder dilution from such expenses. See "Underwriting." The cost of these expenses is approximately $          million (assuming an initial public offering price of $          per share, which is the mid-point of the price range indicated on the front cover page of this prospectus).

Leveraging Angel Oak's In-House Capabilities and Proprietary Mortgage Infrastructure

          We benefit from our Manager's ability to draw on the knowledge, resources, and relationships of Angel Oak, which has an 11-year history in mortgage credit investments. Angel Oak has deep experience originating loans with desired credit and return profiles and utilizing prudently structured financing. Angel Oak's in-house expertise also extends beyond non-QM loans to include commercial real estate, structured credit with an emphasis on MBS, as well as corporate debt, enabling a holistic view of financial markets. Our Manager has direct access to Angel Oak's management platform and mortgage credit resources, providing our Manager with the ability to identify trends and to access Angel Oak's deep market knowledge and operational expertise. Further, our Manager's relationship with Angel Oak creates the ability for our Manager to source, acquire, finance and securitize, and manage target assets on our behalf.

          Through our Manager's relationship with Angel Oak, we have direct access to the following value-added services:

    Mortgage Sourcing — Consists of approximately 290 sales professionals across Angel Oak Mortgage Lending as of December 31, 2020. The wholesale channel has expertise in educating originators regarding Angel Oak's non-QM loan origination "best practices," building loan officer relationships at the local level and spreading awareness of program availability. The retail channel leverages its referral network to access origination volume and utilizes a "grass roots" marketing approach to further grow brand awareness.

    Mortgage Underwriting — Consists of over 40 underwriters in Angel Oak Mortgage Lending as of December 31, 2020. The in-house team serves as a centralized function for the lending platform and ensures that the loans we acquire are subject to high quality underwriting standards and requirements, including the assessment and documentation of the borrower's ability to repay under the ATR rules. Underwriters have access to a comprehensive set of tools and training to assist in their loan evaluation. All loans are subject to incremental review and oversight through in-house pre-closing quality control, a post-closing review by a third-party due diligence firm and investor due diligence in connection with securitization transactions.

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    Portfolio Management and Monitoring — Consists of approximately 80 individuals in Angel Oak Capital as of December 31, 2020, with expertise across all segments of mortgage and structured credit. The team has access to proprietary analytical models and investment infrastructure developed by Angel Oak Capital, and utilizes a quantitative assessment of interest rate risk, prepayment risk and, where applicable, credit risk, both on a portfolio-wide basis and an asset-by-asset basis. The asset management process relies on the sophisticated quantitative tools and methodologies that are the foundation of Angel Oak's investment technique and asset surveillance. These tools enable our Manager to make its asset selection and monitoring decisions.

    Capital Markets — Angel Oak Capital is focused on optimizing capital efficiency. The capital markets team has significant experience in non-QM loan securitizations and manages all Angel Oak financing facilities. Further, the capital markets team is able to leverage Angel Oak's relationships with leading financial institutions to increase the overall number of financing counterparties available to us.

    Business Operations — Our Manager is supported by Angel Oak Capital and Angel Oak Companies, which provide an efficient method of accessing institutional-quality services for key operational functions, such as finance, accounting, legal, compliance, risk, information technology, cyber security, human resources, marketing and other services.

Access to Angel Oak Mortgage Trust Securitizations

          AOMT, Angel Oak's securitization platform, is a leading programmatic issuer of non-QM securities with an established track record and consistent and growing investor base. We, along with other Angel Oak managed entities, have participated together in AOMT non-QM securitizations. In particular, in March 2019, we participated in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non-QM loans, secured primarily by first or second liens on one-to-four family residential properties. In the transaction, Angel Oak Mortgage Trust I 2019-2 ("AOMT 2019-2") issued approximately $620.9 million in face value of bonds. We served as the "sponsor" (as defined in the U.S. Risk Retention Rules) of the transaction and contributed non-QM loans with a carrying value of approximately $255.7 million that we had accumulated and held on our balance sheet. The remaining non-QM loans that we contributed to AOMT 2019-2 were purchased from affiliated and unaffiliated entities. Additionally, in July 2019, we participated in a second securitization transaction of a pool of residential mortgage loans consisting of residential mortgage loans similar to those contributed to AOMT 2019-2. In the transaction, Angel Oak Mortgage Trust 2019-4 ("AOMT 2019-4") issued approximately $558.5 million in face value of bonds and we contributed non-QM loans with a carrying value of approximately $147.4 million that we had accumulated and held on our balance sheet. Another Angel Oak managed entity served as the sponsor of AOMT 2019-4. Furthermore, in November 2019, we participated in a third securitization transaction of a pool of residential mortgage loans consisting of residential mortgage loans similar to those contributed to AOMT 2019-2 and AOMT 2019-4. In the transaction, Angel Oak Mortgage Trust 2019-6 ("AOMT 2019-6") issued approximately $544.5 million in face value of bonds and we contributed non-QM loans with a carrying value of approximately $104.3 million that we had accumulated and held on our balance sheet. Another Angel Oak managed entity served as the sponsor of AOMT 2019-6. Additionally, in June 2020, we participated in a fourth securitization transaction of a pool of residential mortgage loans consisting of residential mortgage loans similar to those contributed to AOMT 2019-2, AOMT 2019-4 and AOMT 2019-6. In the transaction, Angel Oak Mortgage Trust 2020-3 ("AOMT 2020-3") issued approximately $530.3 million in face value of bonds. We served as the "sponsor" (as defined in the U.S. Risk Retention Rules) of the transaction and contributed non-QM loans with a carrying value of approximately $482.9 million that we had accumulated and held on our balance sheet. The remaining non-QM loans that we contributed to AOMT 2020-3 were purchased from an affiliated entity. We, along with other Angel Oak managed entities, have also participated together in a commercial real estate loan securitization. In particular, in November 2020, we participated in a

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securitization transaction of a pool of small balance commercial real estate loans consisting of mortgage loans secured by commercial properties. In the transaction, Angel Oak SB Commercial Mortgage Trust 2020-SBC1 ("AOMT 2020-SBC1") issued approximately $164.3 million in face value of bonds and we contributed commercial real estate loans with a carrying value of approximately $32.5 million that we had accumulated and held on our balance sheet. Another Angel Oak managed entity served as the sponsor of AOMT 2020-SBC1. Growth in Angel Oak Mortgage Lending and Angel Oak managed entities has allowed AOMT to issue securities with greater frequency and in larger deal sizes, enabling economies of scale related to transaction costs. We believe these steady, periodic issuances help increase liquidity and provide transparency into collateral performance, which has garnered positive bond holder sentiment.

          Angel Oak Capital's portfolio management team has worked with Angel Oak Mortgage Lending to provide attractive collateral backing AOMT securitizations. AOMT's securitizations have maintained generally consistent weighted average credit score, DTI and LTV metrics since 2016. In addition, the percentage of (1) loans made to "bank statement borrowers," and (2) "Investor" loans, each of which is described below under "— Our Strategy," has increased since 2016. Approximately 64.4%, 69.0%, 71.2% and 65.2% of the collateral in AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and AOMT 2020-3, respectively, consisted of loans made to "bank statement borrowers" or "Investor" loans, in each case as of the date of such securitization transaction. See "—Our Strategy" below for a description of Angel Oak Mortgage Lending's lending programs. Furthermore, geographic representation has remained diverse and the average deal size has generally increased in conjunction with origination volumes over time.

Market Opportunity

          We believe that the experience and resources of Angel Oak, including our Manager, position us to capitalize on opportunities resulting from the following market conditions:

Non-QM Loans Have Significant Runway for Continued Growth

          Total residential first lien mortgage volume in the United States broadly falls into three categories, with a majority of the volume from 1990 to 2020 consisting of Agency loans and jumbo prime mortgage loans. The remainder of origination volume during this period has been facilitated by private capital investors ("Private Capital Volume"). As a provider of private capital to the residential mortgage market, primarily through non-QM loans, our opportunity lies primarily in this segment of the market.

          According to Inside Mortgage Finance, Private Capital Volume accounted for approximately 9% to 14% of total residential first lien mortgage volume for the 14 years prior to the "bubble years" of 2004 to 2007. Following the financial crisis in 2008 to 2009, Private Capital Volume declined to approximately 0.6% of total residential first lien mortgage volume in 2009, and increased to approximately 2.2% of total residential first lien mortgage volume in 2019. For the year ended December 31, 2020, Private Capital Volume decreased to 0.9% of total residential first lien mortgage volume primarily due to the significant increase in refinance volume without a corresponding increase in Private Capital Volume. Accordingly, we believe that the underlying demand for non-QM loans, backed by private capital investors, remains strong.

          Between 2009 and 2020, total residential first lien mortgage market volume ranged from $1.3 trillion to $4.0 trillion. For the year ended December 31, 2020, total residential first lien mortgage market volume increased to $4.0 trillion primarily due to lower mortgage rates.

          With the continued demand for private capital loan products, including non-QM loans, we believe Private Capital Volume should increase over time. During the 14 years prior to the "bubble years" of 2004 to 2007, private capital volume typically accounted for approximately 10% of annual mortgage production. To the extent that private capital volume reverts to pre-"bubble years" levels of approximately 10%, we believe there is a market opportunity in excess of $150 billion for private capital volume based on annual residential first lien mortgage volume since 2009, which has generally remained at or

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above $1.5 trillion. Moreover, we believe Angel Oak Mortgage Lending's position as a market leader in non-QM loan production will enable us to capitalize on our expectations of growth in Private Capital Volume.

          The following chart depicts Private Capital Volume as a percentage of total residential market volume since 1990:


Private Capital as a Percentage of Total Market Volume

GRAPHIC


Source: Inside Mortgage Finance Publications, Inc.

          We believe underlying demand for non-QM loans has primarily been driven by loan officers and borrowers becoming more educated and familiar with non-QM loan products. Loan officer education has been bolstered in part by loan officers seeking new products to support origination volume during periods of lower refinance volume as well as to capitalize on the growth of the non-QM loan market. We believe that Angel Oak Mortgage Lending is well-positioned to participate as a market leader in the potential growth of the non-QM loan market as it continues to educate loan officers of the benefits and opportunities related to non-QM loans. We also believe that Angel Oak Mortgage Lending's regular interaction with loan officers and other market participants provides it with valuable insight and direct market feedback, enabling Angel Oak to capitalize on opportunities in the non-QM loan market.

Angel Oak Mortgage Lending Provides Borrowers with Access to Non-QM Mortgage Products

          Beginning on January 10, 2014, residential mortgage originators became subject to lending standards established by the CFPB pursuant to authority granted under the Dodd-Frank Act. Central to the updated lending standards are the ATR rules, which require mortgage lenders to make a reasonable, good faith determination of each borrower's ability to repay a loan without selling the property. A lender who fails to comply with the ATR rules could be liable for all finance charges and fees paid by the borrower, legal costs, and other applicable damages unless the lender demonstrates that such failure to comply was not material. With respect to mortgage loans originated to the standards of QM loans, such loans that are not "higher-priced" are provided a safe harbor, whereas loans that are higher-priced are given a rebuttable presumption of compliance with the ATR rules, provided that certain requirements are met. Further, lenders that originate mortgage loans to the standards of QM loans are granted a safe harbor from litigation if borrowers default, provided that certain requirements are met. Any loan that fails to meet these strict criteria and falls outside the parameters is deemed "non-QM."

          Non-QM loans have become an increasingly important component of the residential mortgage market since first being offered in 2014, which we believe is being driven in large part by higher-quality borrowers continuing to be left behind because they fall outside the stringent QM loan standards. Angel Oak Mortgage Lending's non-QM loan products are designed to provide financing to higher-quality non-QM loan borrowers, including bank statement borrowers, just missed DTI borrowers, high net worth borrowers, real estate investors and prior credit event borrowers. See "— Our Strategy" below for a description of Angel Oak Mortgage Lending's lending programs.

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Non-QM Criteria Incorporates Lessons Learned from the Financial Crisis

          We believe that non-QM loans should not be compared to non-Agency loans issued prior to the financial crisis in 2008 through 2009. As shown in the table below, the underwriting standards relating to these two types of loans are vastly different, as the underwriting process has been transformed because of regulatory changes and enhanced lender oversight, resulting in better quality borrowers being subject to heightened underwriting requirements. Today, originators use fraud risk tools that did not exist in the pre-crisis period. These tools flag misrepresentations, undisclosed property and occupancy fraud and undisclosed debt. In the pre-crisis period, loan officers were incentivized to close loans to generate volume and were able to influence the appraisal process. Originators now use independent third-party appraisal management companies to maintain appraiser independence. In addition, all loans now require a form of income documentation (e.g., tax documents or bank statements) to prove the borrower's ability to repay as required by the ATR rules. In comparison, pre-crisis underwriting practices utilized low or no documentation of borrower assets or income. Further, most non-QM loans generally include a significant equity buffer, as most loans have an LTV of less than 80%.

          The following chart sets out certain general characteristics of 2006 Alt-A mortgage loans and subprime mortgage loans compared to 2020 non-QM loans:

Illustrative Loan Characteristics

Loan Origination
Year
 LTV Low or No
Documentation
of Borrower
Assets or
Income
 DTI FICO Appraisal
2006 Alt A 82%(1) 80% 37%(2) 706 Loan officer in charge of the appraisal process
2006 Subprime 86%(1) 38% 41%(2) 618 Loan officer in charge of the appraisal process
2020 Non-QM Generally, LTVs less than 80%  35%(3) 722(4) Appraisal provided by independent third party, ordered by the lender

Source for 2006 LTVs, Documentation and DTIs: United States Government Accountability Office Report: 09-848R Nonprime Mortgages.

(1)
Represents average combined loan-to-value ("CLTV"), which includes both the first mortgage and any subsequent second-lien mortgage loans.

(2)
Represents average DTI.

(3)
Represents average DTI on expanded credit securitizations in 2020, as reported by Inside Mortgage Finance Publications, Inc.

(4)
Represents the weighted average FICO score of the loans underlying AOMT's RMBS securitizations conducted during the year ended December 31, 2020, as of the date of origination of each such loan.

Non-QM Securitization Market Supports Strategy

          From December 31, 2014 to December 31, 2020, a total of 184 non-QM securitization transactions have been completed, generating cumulative issuance volume of approximately $65.0 billion in the non-QM securitization market. Growth of the non-QM securitization market during this period has provided us and Angel Oak Mortgage Lending with significant benefits. As the non-QM securitization market has grown, rating agencies have entered the space, providing third-party assessments on the quality of collateral and helping investors gain comfort around the asset class. AOMT, Angel Oak's securitization platform, is a leading programmatic issuer of non-QM securities and its issuances have benefited from increased demand and a larger, more liquid market in recent years. We believe that access to the non-QM securitization market will enable us to execute our strategy, as we expect it to provide us with attractive term financing for our mortgage loans and the opportunity to retain securities that we believe contribute in providing attractive risk-adjusted returns for our stockholders. Furthermore,

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we expect that this access to the non-QM securitization market will enable us to grow our asset base, use our capital efficiently and achieve what we believe to be an attractive leverage profile for our stockholders.

Non-QM Lenders Benefit from More Limited Competition Due to Barriers to Entry

          The origination process for non-QM loans is substantially different from that required to originate Agency loans. Non-QM loans typically require more comprehensive upfront underwriting to ensure that a loan will meet specified credit and regulatory standards. This approach is a meaningful contrast to the typical methods of originating Agency loans, which are more commoditized in nature. In addition, non-QM loan volume constitutes a relatively small portion of the total loan volume that most Agency lenders produce. Accordingly, many Agency lenders have chosen to focus production on their core Agency products, which can be originated using existing operational infrastructure, and have formed relationships with experienced non-QM lenders, such as Angel Oak Mortgage Lending, to provide a competitive non-QM loan offering for their loan officers and borrowers.

          Banks participate in the non-QM loan market; however, private capital lenders have historically maintained a larger market share. We believe that larger banks originate non-QM loans typically when a strong customer relationship exists. Recently, larger banks have focused their mortgage loan origination activity on their core Agency and jumbo prime mortgage loans. We expect this trend to continue since we believe that perceived risks will limit larger banks from increasing their non-QM loan origination volume in the near term. Further, we believe bank regulatory capital requirements make other mortgage products more attractive on a relative basis compared to non-QM loans. In the future, we believe that banks may enter the market in greater scale as non-QM loans become a larger segment of the overall mortgage market.

Our Competitive Strengths

          We believe the following competitive strengths differentiate us and position us to implement our strategy:

Access to Angel Oak's Capabilities to Organically Create or Acquire Attractive Investments

          Angel Oak Mortgage Lending originated approximately $3.3 billion and $1.5 billion in non-QM loans for the years ended December 31, 2019 and 2020, respectively. The lending platform is an integral component of Angel Oak's historical expertise in mortgage credit, and we believe will serve as a source of non-QM loans and other target assets with sufficient scale necessary for us to quickly and efficiently deploy our capital. We believe that our access to Angel Oak Mortgage Lending's origination platform also differentiates us among most other U.S. public mortgage REIT peers by providing us with the ability to pursue our primary strategy focused on non-QM loans.

          Through our Manager's relationship with Angel Oak Mortgage Lending, we are able to primarily utilize an "originator model" of sourcing loans, which we believe provides tangible value and differentiation compared to an "aggregator model" that is dependent on third-party origination and underwriting. Angel Oak Mortgage Lending has control over the credit underwriting process, the ability to source loans with our desired credit and return profile, as well as access to loans from a diverse geographic footprint and from a broad set of loan programs — enabling us to acquire and invest in loans with attractive relative value. Additionally, as described in more detail above, we believe that Angel Oak Mortgage Lending's "originator model" creates more durable access to non-QM loan volume and provides us with access to the non-QM loan market during periods of disruption. Further, we believe the regulatory and operational burden of launching a mortgage company creates significant barriers to entry.

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          In addition, we will utilize Angel Oak's extensive relationships, mortgage industry experience, and structured products expertise to acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases.

Angel Oak Provides Customized Solutions for Non-QM Loan Borrowers

          We believe there is an opportunity to generate attractive risk-adjusted returns by acquiring and investing in mortgage loans that solve the needs of a large population of higher-quality non-QM loan borrowers currently with limited access to Agency and traditional bank origination channels. We, through Angel Oak Mortgage Lending, provide non-QM loan borrowers with tailored loan products that also meet disciplined underwriting standards. Angel Oak Mortgage Lending originates loans that have low LTVs (generally in the range of 70% to 80%) and that have adequate borrower reserves in case of unexpected job loss or other contingencies across all programs. The combination of different loan programs leads to diversification by borrower profile and helps to mitigate risks in broad pools of loans. Our non-QM loan assets generally fall into the following four loan programs: "Bank Statement" loans, "Just Missed Prime" loans, "Investor" loans, and, when we determine that market conditions present attractive opportunities, "Non-Prime" loans. See "— Our Strategy" below for a description of Angel Oak Mortgage Lending's lending programs.

          Additionally, we believe that the disciplined underwriting standards of Angel Oak Mortgage Lending and the credit quality of the loans underlying our portfolio of RMBS are reflected in the credit characteristics of the pool of mortgage loans securitized by AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and AOMT 2020-3. We present the characteristics of loans underlying our portfolio of RMBS issued in securitizations because, pursuant to our strategy, our directly held loans are typically contributed to securitizations after a limited time period. In contrast, the loans underlying our portfolio of RMBS that we receive in respect of such contribution are generally held by such securitizations for a significant time period and such loans reflect the credit and other characteristics of the assets (i.e., RMBS) that we will likely hold for a longer duration.

          Although prior to the COVID-19 pandemic our investment strategy extended to each of the loan categories reflected in the chart below, we are currently focused on making investments in "Bank Statement" loans originated through Angel Oak Mortgage Lending's Bank Statement Program, "Just Missed Prime" loans originated through Angel Oak Mortgage Lending's Platinum Program and "Investor" loans originated through Angel Oak Mortgage Lending's Investor Cash Flow Program. The following chart provides additional information regarding the credit characteristics of the loans underlying our portfolio of RMBS issued by AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and AOMT 2020-3 as of December 31, 2020 based on the type of loan program utilized and do not include our other assets, such as non-QM loans that we owned directly at such date:

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Our RMBS Portfolio Characteristics

GRAPHIC


(1)
Total portfolio also includes second lien mortgage loans with an unpaid principal balance of approximately $29.3 million as of December 31, 2020.

(2)
As of the date of origination of each of the loans underlying our portfolio of RMBS.

In Place Portfolio Demonstrates Execution of our Strategy

          Since our commencement of operations in September 2018 through December 31, 2020, we have acquired $1.2 billion of residential mortgage loans and commercial real estate loans, a substantial portion of which were sourced by Angel Oak Mortgage Lending. As of December 31, 2020, we have participated in five rated securitization transactions and we had total assets of approximately $509.7 million, including an approximate $308.2 million portfolio of non-QM loans and other target assets. We believe that our portfolio validates our strategy of making credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending.

          AOMT 2019-2's, AOMT 2019-4's, AOMT 2019-6's and AOMT 2020-3's portfolios of non-QM loans include "Bank Statement" loans made to "bank statement borrowers" who are underwritten using bank statement documentation. These "bank statement borrowers," who had a weighted average FICO score of 720 at origination of each loan as of the date of securitization, are self-employed and need an alternate income calculation. In addition, AOMT 2019-2's, AOMT 2019-4's, AOMT 2019-6's and AOMT 2020-3's portfolios include "Investor" loans made to professional real estate investors in connection with them purchasing, renting and managing investment properties. See "— Our Strategy" below for a description of Angel Oak Mortgage Lending's lending programs. Both of these types of borrowers have generally exhibited slower prepayment speeds, and, as of December 31, 2020, collectively represented 71.6%, 74.7%, 79.4% and 66.4% of the portfolios owned by AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and

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AOMT 2020-3, respectively, which does not include our other assets, such as non-QM loans that we owned directly at such date.

          As of December 31, 2020, our portfolio consisted predominantly of non-QM loans owned directly and RMBS issued by AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and AOMT 2020-3. Further, our portfolio includes certain CMBS issued by AOMT 2020-SBC1.

          The following charts illustrate the quality and diversity of the loans underlying our portfolio of RMBS as of December 31, 2020, based on the product profile, borrower profile and geographic location and do not include our other assets, such as non-QM loans that we owned directly at such date.


Our RMBS Portfolio Characteristics(1)

GRAPHIC


(1)
As of December 31, 2020.

(2)
No state in "Other" represents more than a 4% concentration of the loans in the portfolios owned by AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and AOMT 2020-3.

          Additionally, as of December 31, 2020, our portfolio consisted of approximately $142.0 million of non-QM loans and $7.5 million of commercial real estate loans that we owned directly at such date. For more information regarding the characteristics of the non-QM loans and commercial real estate loans that we owned directly as of December 31, 2020, see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Our Portfolio — Residential Mortgage Loans" and "— Commercial Real Estate Loans." As of December 31, 2020, our portfolio also consisted of approximately $8.8 million of CMBS.

Target Assets Generate Attractive Risk-Adjusted Returns Across Interest Rate and Credit Cycles

          We intend to continue growing our portfolio by acquiring target assets that we believe will provide attractive risk-adjusted returns for our stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. As of December 31, 2020, the loans underlying our portfolio of RMBS had a WAC of 6.53%, which was 388 basis points above the interest rates for 30-year fixed rate Agency loans as of the same date.

          We believe that non-QM loan borrower prepayment behavior is typically driven by factors beyond changes in interest rates alone, such as credit improvement and housing turnover. Accordingly, we believe the non-QM loans underlying our portfolio of RMBS are less sensitive to prepayment risk if interest rates decline. Further, as of December 31, 2020, approximately 71.6%, 74.7%, 79.4% and 66.4% of the portfolio of loans owned by AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and AOMT 2020-3, respectively, were made to "bank statement borrowers" and "Investor" borrowers, a group of borrowers that generally demonstrate a slower prepayment speed. See "— Our Strategy" below for a description of Angel Oak Mortgage Lending's lending programs.

          At the same time, our portfolio benefits from certain downside protections. Approximately 98.5%, 99.6%, 96.0% and 98.3% of the portfolio of loans owned by AOMT 2019-2, AOMT 2019-4, AOMT 2019-6

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and AOMT 2020-3, respectively, in each case as of the date of such securitization transaction, were first lien on the underlying asset. Such loans have strong credit characteristics with a weighted average FICO score of 712, 707, 715 and 721, a weighted average LTV of 78%, 78%, 75% and 74% and a weighted average DTI of 35%, 34%, 33% and 34%, respectively, as of the date of origination of each loan.

Leading Management Team with Extensive Experience in the Residential Mortgage Business

          We believe that the significant and diverse experience of our officers and members of the senior management team of our Manager and Angel Oak provides us with access to investment opportunities and management expertise across our target assets. Our Manager is led by a cycle-tested team of professionals, each with over 15 years of experience in the finance and mortgage business sectors. This group is led by Robert Williams, our Chief Executive Officer and the Chief Executive Officer of our Manager, Brandon Filson, our dedicated Chief Financial Officer and Treasurer, Sreeniwas Prabhu, Managing Partner and Co-Chief Executive Officer of Angel Oak Capital and the President of our Manager, Michael Fierman, the Chairman of our Board of Directors and a Managing Partner and Co-Chief Executive Officer of Angel Oak Companies, and Namit Sinha, Co-Chief Investment Officer, Private Strategies of Angel Oak. Mr. Williams has more than 30 years of experience in the banking, investment banking and mortgage banking sectors and formerly served as a Senior Vice President with SunTrust Banks, Inc., where he was head of fixed income trading and research and managed a team that handled all treasury capital market functions, such as investment portfolio, funding and capital management. Mr. Filson has more than 15 years of experience in financial and accounting roles in the real estate sector and, prior to Angel Oak, was the Vice President and Real Estate Controller of iStar Inc. (NYSE: STAR) and Safehold Inc. (NYSE: SAFE), formerly Safety, Income and Growth, Inc., both publicly traded REITs. Mr. Prabhu has over 20 years of investment experience across residential and commercial strategies, including serving as the Chief Investment Officer of the investment portfolio at Washington Mutual Bank in Seattle. Mr. Fierman has over 20 years of investment experience and prior to Angel Oak Companies, founded SouthStar Funding, a national wholesale mortgage lender specializing in non-Agency mortgage products. Mr. Sinha has more than 15 years of experience in fixed income products including structured credit and, prior to Angel Oak, Mr. Sinha spent four years as Senior Vice President at Canyon Capital Advisors, where he was a leader in its residential loan trading business in addition to covering its structured products operations. We believe this experience enhances our ability to invest in our target assets across a range of interest rate and credit cycles.

Capital Markets Experience Assists in Cost of Capital Efficiencies

          Our Manager has access to Angel Oak Capital's portfolio management team, which has significant experience executing non-QM loan securitization transactions and manages all Angel Oak financing facilities. Our Manager is able to leverage Angel Oak's expertise and relationships with a large network of financial institutions, including by increasing the overall number of financing counterparties available to us. We have in-place loan financing lines with a combination of global money center and large regional banks, under which we had an aggregate of approximately $81.9 million of debt outstanding as of December 31, 2020. As of December 31, 2020, our loan financing lines permit borrowings in an aggregate amount of up to $525.0 million, leaving approximately $443.1 million of capacity as of December 31, 2020. AOMT, Angel Oak's securitization platform, is a leading programmatic issuer of non-QM securities and had issued approximately $6.9 billion in such securities through 18 rated offerings as of December 31, 2020 — making AOMT among the largest issuers of such securities since 2015.

Underwriting Approach Utilizes Multiple Layers of Quality Control

          The loans we acquire from Angel Oak Mortgage Lending are subject to disciplined underwriting and evaluation by Angel Oak Mortgage Lending's in-house team of over 40 underwriters, ensuring that our loans meet desired credit and return profiles. Regardless of the type of loan, the underwriting process is the same and consists of income and asset verification through tax documents or bank

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statements that are corroborated independently with available technology that goes directly to the source, such as the Internal Revenue Service (the "IRS") or a bank. Angel Oak Mortgage Lending uses fraud risk tools, which flag misrepresentation and fraudulent activity, such as IRS Form 4506T, Mortgage Electronic Registration Systems ("MERS") to identify undisclosed property and occupancy fraud and Credit GAP Reports to identify undisclosed debt. Further, the lending platform utilizes independent appraisal management companies to maintain appraiser independence by creating a wall between the appraisers and the loan officers. Moreover, a third-party due diligence firm reviews all of the loans and their supporting documents. Angel Oak Mortgage Lending's underwriting process has several layers of checks and balances, as well as incremental focus on credit quality from rating agencies and senior bond buyers of Angel Oak securitizations.

          After funding a loan, Angel Oak is in constant dialogue with the appropriate third-party servicer with regard to borrower patterns to further understand loan performance. The applicable third-party servicer handles daily servicing activities, including the collection of all interest and principal payments. See "Business — Investment Process" below for additional details regarding our underwriting procedures.

Investment Platform Fully Integrated with Angel Oak's Extensive Infrastructure

          Through our relationship with our Manager, we have access to Angel Oak, a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets. We expect to leverage Angel Oak's vertically integrated platform and in-house expertise to generate attractive risk-adjusted returns for our stockholders. Angel Oak Capital had approximately $10.6 billion in assets under management as of December 31, 2020, across private credit strategies, multi-strategy funds, separately managed accounts and mutual funds, including $6.4 billion of mortgage-related assets. Angel Oak Mortgage Lending is a market leader in non-QM loan production and, as of December 31, 2020, had originated over $8.8 billion in total non-QM loan volume since its inception in 2011. Further, AOMT, Angel Oak's securitization platform, is a leading programmatic issuer of non-QM securities and had issued approximately $6.9 billion in such securities through 18 rated offerings as of December 31, 2020 — making AOMT among the largest issuers of such securities since 2015.

          We believe that the broad experience of Angel Oak provides a significant competitive advantage to us, contributes to the strength of our business, and enhances the quantity and quality of investment opportunities available to us. Our Manager has direct access to Angel Oak's management platform and mortgage credit resources, providing our Manager with the ability to identify trends and to access Angel Oak's deep market knowledge and operational expertise. Furthermore, we believe our ability to identify and acquire target assets through the secondary market is bolstered by Angel Oak's experience in the mortgage industry and expertise in structured credit investments. Our management team includes mortgage investment and lending professionals from Angel Oak's team of over 650 employees across its enterprise. We benefit from our Manager's ability to draw on the knowledge, resources and relationships of Angel Oak.

Our Strategy

          Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending, which operates through wholesale and retail channels and has a national origination footprint. We also may invest in other target assets as described below. Further, we may identify and acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases. We finance these loans through various financing lines on a short-term basis and ultimately seek to secure long-term securitization funding for our target assets. We expect to derive our returns primarily from the difference between the interest we earn on loans we make and our cost of capital, as well as the returns from bonds, including Risk Retention Securities (as defined below), that are retained

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after securitizing the underlying loan collateral, which we believe will lead to an attractive risk-adjusted return profile, across interest rate and credit cycles.

          We believe that access to Angel Oak's vertically integrated platform and in-house expertise provides our Manager with the resources we believe are necessary to source, acquire, finance and securitize and manage non-QM loans and other target assets with desired credit and return profiles. Furthermore, we believe that Angel Oak's platform and mortgage credit resources provide our Manager with the ability to identify trends and to access Angel Oak's deep market knowledge and operational expertise. Although our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak Mortgage Lending, we may also acquire non-QM loans and other target assets from unaffiliated third parties, including through the secondary market when market conditions and asset prices are conducive to making attractive purchases.

          We believe there is an opportunity to generate attractive risk-adjusted returns by acquiring and investing in mortgage loans that solve the needs of a large population of higher-quality non-QM loan borrowers currently with limited access to Agency and traditional bank origination channels. We pursue non-QM loans with attractive spreads and downside protection with more limited prepayment risk if interest rates decrease. Our non-QM loan assets generally fall into Angel Oak's Bank Statement Program, Platinum and Portfolio Select Programs and Investor Cash Flow Program (each as described below) and provide customized solutions for a desirable set of borrowers. Under current market conditions, Angel Oak Mortgage Lending is only originating mortgage loans through its Bank Statement Program, Platinum Program and Investor Cash Flow Program and is using more stringent underwriting guidelines than were in effect prior to the onset of the COVID-19 pandemic.

"Bank Statement" Loans (Angel Oak's Bank Statement Program)

    Designed for borrowers that have prime or near-prime credit scores but who are self-employed and need an alternate cash flow income calculation that precludes them from receiving a mortgage through conventional or government channels. Representative borrowers include:

    Bank Statement Borrowers — Self-employed borrowers who have prime or near-prime credit scores, significant cash reserves, substantial income, and down payments in cash averaging 20% to 25% of the loan amounts.

"Just Missed Prime" Loans (Angel Oak's Platinum and Portfolio Select Programs)

    Designed for borrowers who typically have prime or near-prime credit scores but have an isolated credit event usually caused by a life event and that is not indicative of their overall credit profile; borrowers may have been subject to a prior bankruptcy or foreclosure, or have a higher DTI requirement. Representative borrowers include:

    Just Missed DTI Borrowers — Have high credit scores and steady, documented income, typically putting more than 20% down; however, they may have current debt or financial circumstances that put them over a 43% DTI.

    High Net Worth Borrowers (Angel Oak Asset Qualifier Program) — Have prime credit and substantial assets that exceed the property value and the debt load; however, they choose to use a financing instrument for cash flow and tax purposes. Strong credit and substantial assets; however, standard income documentation is not required. These borrowers could include, but are not limited to, retirees or individuals who have accumulated substantial liquid assets.

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    "Investor" Loans (Angel Oak's Investor Cash Flow Program)

      Designed for real estate investors who are purchasing, renting, and managing investment properties. Representative borrowers include:

      Real Estate Investors — Have an established two-year credit history and at least 24 months of clean housing payment history with no delinquencies, but are looking to obtain financing based on the property's cash flow rather than with standard income documentation. Borrowers are required to sign a certification at application which states that the properties are not owner occupied and are owned solely for investment purposes. Borrowers are qualified based on a debt service coverage ratio.

              In addition, if Angel Oak Mortgage Lending reintroduces the following programs and we determine that market conditions present attractive opportunities, we may return to investing in loans offered in these programs:

    "Non-Prime" Loans

      Designed for borrowers that have experienced issues in payment history. Representative borrowers include:

      Prior Credit Event Borrowers — Have credit reports showing multiple delinquencies on any reported debt in the past 24 months or have experienced a housing event (completed or have had their properties subject to a short sale, deed-in-lieu, notice of default or foreclosure) in the past 24 months.

    "Jumbo Prime" Loans

      Designed for borrowers that have strong credit histories, who are seeking large loans. Representative borrowers include:

      Jumbo Prime Borrowers — Prime borrowers with higher credit scores who have loan balances above Agency limits, and with no bankruptcy or foreclosure event in the prior 60 months.

              We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we expect to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long-term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements.

              Subject to 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, we also expect to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. See "— Our Financing Strategies and Use of Leverage" and "Business — Our Hedging Strategy."

    Our Target Assets

              Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending. We also may invest in other target assets listed below. Further, we may identify and acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive

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    purchases. For additional information regarding our target assets, see "Glossary." Our target assets include:

    Target Assets
      
    Investments Backed by 

    Non-QM loans

    Residential Properties 

    Non-Agency RMBS

    Investment property loans

    Jumbo prime mortgage loans

    Investments Backed by

     

    Senior mortgage loans

    Commercial Real Estate Properties 

    Commercial bridge loans

    Small balance commercial real estate loans

    Other Investments Backed by

     

    Agency RMBS

    Residential Properties, 

    Second lien mortgage loans

    Commercial Real Estate Properties and Other Assets 

    Mezzanine loans

    Construction loans

    B-Notes

    QM loans

    Conforming residential mortgage loans

    Residential bridge ("fix and flip") loans

    Subprime residential mortgage loans

    Alt-A mortgage loans

    CRT securities

    CMBS

    MSRs and excess MSRs

    Certain non-real estate-related assets, including ABS and consumer loans

              Our strategy is adaptable to changing market environments, subject to our ability to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes and to maintain our exclusion from regulation as an investment company under the Investment Company Act. Our investment and asset management decisions will depend on prevailing market conditions. Accordingly, our strategy and target assets may vary over time in response to market conditions. In this regard, under current market conditions, Angel Oak Mortgage Lending is only originating mortgage loans through its Bank Statement Program, Platinum Program and Investor Cash Flow Program and is using more stringent underwriting guidelines than were in effect prior to the onset of the COVID-19 pandemic. Originations from Angel Oak Mortgage Lending's other programs may be reintroduced over time. Our Manager is authorized to follow very broad investment guidelines and, as a result, we cannot predict our portfolio composition. We may change our strategy and policies without a vote of our stockholders.

    Our Financing Strategies and Use of Leverage

              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. We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we expect to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long-term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements. We have in-place loan financing lines with a combination of global money center and large regional banks, under which we had an aggregate of approximately $81.9 million of debt outstanding as of December 31, 2020. As of December 31, 2020, our loan financing lines permit borrowings in an aggregate amount of up to $525.0 million, leaving approximately $443.1 million of capacity as of December 31, 2020.

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              In addition to our existing loan financing lines, we employ short-term repurchase facilities to borrow against U.S. Treasury securities, securities issued by AOMT, Angel Oak's securitization platform, and other securities we may acquire in accordance with our investment guidelines. As of December 31, 2020, there was approximately $178.3 million outstanding under these repurchase facilities, with weighted average interest rates ranging from 0.25% to 1.40%.

              Our use of leverage, especially in order to increase the amount of assets supported by our capital base, may have the effect of increasing losses when these assets underperform. The amount of leverage employed on our assets will depend on our Manager's assessment of the credit, liquidity, price volatility and other risks and availability of particular types of financing at any given time. Moreover, our charter, second amended and restated bylaws (our "bylaws") and investment guidelines require no minimum or maximum leverage and our Manager will have the discretion, without the need for further approval by our Board of Directors, to change both our overall leverage and the leverage used for individual asset classes. Because our strategy is flexible, dynamic and opportunistic, our overall leverage and the leverage used for individual asset classes will vary over time. As of December 31, 2019, our leverage ratio was approximately 3.82x total debt to total equity, which included debt from our loan financing lines and repurchase facilities, but excluded debt in our non-recourse securitization transactions. We expect our leverage ratio to decrease over time as our RMBS portfolio, which is financed with our repurchase facilities at a rate generally less than 1:1 debt to equity, becomes a larger percentage of our overall portfolio. As of December 31, 2020, our leverage ratio fell to 1.05x total debt to total equity, due to the AOMT 2020-3 securitization in June 2020 and the resulting lower amount of residential mortgage loans held at December 31, 2020. We expect that our leverage ratio will increase in the near term as we continue to purchase additional loans from Angel Oak Mortgage Lending over the next few quarters, and generally will remain at less than 3:1 over time but may exceed this ratio from time to time.

    Our Investment Guidelines

              Upon completion of this offering, our Board of Directors will have approved the following investment guidelines:

      No investment shall be made that would cause us to fail to qualify as a REIT under the Code;

      No investment shall be made that would cause us or any of our subsidiaries to be regulated as an investment company under the Investment Company Act;

      Our investments will be predominantly in our target assets;

      Prior to the deployment of capital into our target assets, our Manager may cause our capital to be invested in any short-term investments in money market funds, bank accounts, overnight repurchase agreements with primary U.S. Federal Reserve Bank dealers collateralized by direct U.S. Government obligations and other instruments or investments determined by our Manager to be of high quality; and

      The acquisition of any of our target assets by us or any of our subsidiaries from Angel Oak Mortgage Lending or other affiliate of our Manager shall require the approval of our affiliated transactions committee, which will be comprised of two of our independent directors.

              These investment guidelines may be amended, restated, modified, supplemented or waived by our Board of Directors (which must include a majority of our independent directors) from time to time without the approval of, or prior notice to, our stockholders.

    Recent Developments

      COVID-19

              The COVID-19 pandemic is causing severe and unprecedented disruptions to the U.S. and global economies and has contributed to volatility and negative pressure in financial markets. The outbreak has

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    led governments and other authorities around the world to impose or re-impose measures intended to control its spread, including restrictions on freedom of movement, such as quarantine and "stay-at-home" orders, restrictions on travel and transport, school closures, limits on the operations of non-essential businesses and other workforce pressures.

              The impact of the COVID-19 pandemic, measures to prevent its spread and government actions to mitigate its impact had an adverse effect on us in the past and may continue to adversely affect us as long as the outbreak persists and potentially even longer. The ultimate impact of the COVID-19 pandemic on us depends on many factors that are not within our control, including, but not limited, to: governmental, business and individuals' actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic, and actions taken in response thereto, on global and regional economies and economic activity; the availability of U.S. federal, state, local or non-U.S. funding programs; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. However, to the extent current conditions worsen, it could have a material adverse effect on the value of our assets, our financial condition, results of operations and liquidity, and, in turn, cash available for distribution to our stockholders. Even after the COVID-19 pandemic subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.

              As a result of COVID-19, Angel Oak Mortgage Lending scaled down its operations considerably and ceased new originations for a period commencing in March 2020, and in May 2020 re-entered the market. Angel Oak Mortgage Lending re-entered the originations market with a more limited offering of non-QM loans than prior to the COVID-19 pandemic and has tightened the underwriting criteria in effect under the programs that it is currently offering. As a result, the volume of non-QM loans available for us to purchase from Angel Oak Mortgage Lending has been more limited than prior to the COVID-19 pandemic, although the volume has increased considerably from May 2020 to February 2021. Prior to the onset of the COVID-19 pandemic in the United States, between January 1, 2020 and March 31, 2020, we acquired 958 loans for an aggregate purchase price of $389.1 million. We paused loan purchases in April 2020 through August 2020, resuming purchases in September 2020. From September 1, 2020 through March 5, 2021, we have purchased 316 loans for an aggregate purchase price of $167.2 million. Due to the uncertainty as to the duration of the COVID-19 pandemic and the timing of the reopening of the economy, we are not able to predict with any significant level of confidence the timeline for the return of the market for the origination of non-QM loans at levels experienced prior to the COVID-19 pandemic. However, we are currently well-positioned to invest large amounts of capital into our target assets consistent with our strategy of making credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending. Although we remain wary of the potential resurgence of COVID-19 infections in the United States, we believe our portfolio remains strong and our pipeline of potential loan opportunities from Angel Oak Mortgage Lending remains robust and continues to increase since Angel Oak Mortgage Lending re-entered the originations market for non-QM loans in May 2020.

              For further discussion of the impacts of the COVID-19 pandemic on us, see "Risk Factors — Risks Related to the COVID-19 Pandemic — The COVID-19 pandemic, measures intended to prevent its spread and government actions to mitigate its economic impact have caused, and are expected to continue to cause, severe and unprecedented disruptions in the U.S. and global economies and financial markets, and had an adverse effect on us in the past and could have a material adverse effect on us in the future."

      Loan Acquisitions

              From January 1, 2021 through March 5, 2021, we acquired $59.6 million in UPB of non-QM loans from Angel Oak Mortgage Lending for an aggregate purchase price of $61.6 million.

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      Drawdown of Capital Commitments

              In February 2021, Angel Oak Mortgage Fund completed a drawdown of $56.3 million of capital commitments from its limited partners. As of the date of this prospectus, no capital commitments to Angel Oak Mortgage Fund remain outstanding. Subsequent to December 31, 2020 through March 5, 2021, Angel Oak Mortgage Fund contributed approximately $48.3 million to us.

      Loan Financing Lines

              On January 5, 2021, we entered into an amendment with Banc of California, National Association ("Banc of California") with respect to our loan financing line to extend the maturity date from January 9, 2021 to February 18, 2021. On February 18, 2021, we entered into an amendment with Banc of California with respect to our loan financing line to extend the maturity date from February 18, 2021 to March 31, 2021. We are currently in negotiations with Banc of California to amend and extend the maturity of the loan financing line for an additional year, however there can be no assurance that we will be successful in executing such amendment upon the terms contemplated or other terms, or at all.

              On March 5, 2021, we and our subsidiary entered into a master repurchase agreement with Goldman Sachs Bank USA ("Goldman"). Pursuant to the agreement, we or our subsidiary may sell to Goldman, and later repurchase, up to $200.0 million aggregate borrowings on mortgage loans. The agreement expires on March 5, 2022, unless terminated earlier pursuant to the terms of the agreement.

    Our Structure and Formation

              We commenced operations in September 2018 and are organized as a Maryland corporation. On February 5, 2020, we formed our operating partnership through which substantially all of our assets are held and substantially all of our operations are conducted, either directly or through subsidiaries. Prior to the completion of this offering and our formation transactions, all of our common stock is owned by Angel Oak Mortgage Fund, a private investment fund formed in February 2018 with an aggregate of $303 million in equity capital commitments since commencement of operations, including an aggregate of $1.0 million in equity capital commitments made by Sreeniwas Prabhu, Managing Partner and Co-Chief Executive Officer of Angel Oak Capital and the President of our Manager, and Michael Fierman, the Chairman of our Board of Directors and a Managing Partner and Co-Chief Executive Officer of Angel Oak Companies. Prior to the completion of this offering and our formation transactions, our Manager serves as the general partner and investment manager of Angel Oak Mortgage Fund. Since commencement of operations, Angel Oak Mortgage Fund has conducted all of its investment activity through us.

              We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. Commencing with our taxable year ended December 31, 2019, we believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Code. Our qualification as a REIT, and maintenance of such qualification, will depend on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our stock. We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act.

      Our Operating Partnership

              On February 5, 2020, we formed our operating partnership through which we conduct our operations. Our wholly-owned subsidiary, Angel Oak Mortgage OP GP, LLC, is the sole general partner (the "general partner") of our operating partnership. Substantially all of our assets are held by, and our operations are conducted through, our operating partnership. Upon the completion of this offering and

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    our formation transactions, we will contribute the net proceeds of this offering to our operating partnership in exchange for OP units and hold 100% of the limited partnership and, indirectly, general partnership interests in our operating partnership. Through our wholly-owned subsidiary, Angel Oak Mortgage OP GP, LLC, the sole general partner of our operating partnership, we generally have the exclusive power under the partnership agreement of our operating partnership (the "partnership agreement") to manage and conduct our operating partnership's business and affairs. See "Our Operating Partnership and the Partnership Agreement" for a more detailed description of our operating partnership and the partnership agreement.

      Formation Transactions

              Prior to or concurrently with the completion of this offering, we will engage in the following formation transactions that are designed to organize us as a holding company and effectuate this offering.

      We will amend and restate our charter and bylaws to reflect the provisions described in this prospectus.

      We will declare a stock dividend that will result in the issuance of             shares of our common stock to Angel Oak Mortgage Fund, as our sole common stockholder prior to this offering (based on the mid-point of the price range indicated on the front cover page of this prospectus). The stock dividend will be payable immediately prior to the completion of this offering. Investors in this offering will not be entitled to receive this stock dividend. Our operating partnership will similarly make a distribution of               OP units to us.

      Angel Oak Mortgage Fund will distribute the             shares of our common stock that it receives from us pursuant to the stock dividend referred to above to its partners pursuant to the terms of the limited partnership agreement (as amended, the "limited partnership agreement") of Angel Oak Mortgage Fund. We refer to the partners of Angel Oak Mortgage Fund, upon the distribution to such partners of the             shares of our common stock referenced above by Angel Oak Mortgage Fund, collectively, as our "fund investors."

      We and our Manager will enter into separate shareholder rights agreements with each of NHTV Atlanta Holdings LP (the "MS Entity"), an affiliate of Morgan Stanley & Co. LLC, one of the underwriters in this offering (the "MS shareholder rights agreement"), and Xylem Finance LLC (the "DK Entity"), an affiliate of Davidson Kempner Capital Management LP (the "DK shareholder rights agreement" and, together with the MS shareholder rights agreement, our "shareholder rights agreements"), pursuant to which the MS Entity and the DK Entity will each be entitled to designate one nominee for election to our Board of Directors, subject to certain limitations. For more information about our shareholder rights agreements, see "Certain Relationships and Related Party Transactions — Shareholder Rights Agreements." We and our Manager will also separately enter into a stockholder's agreement with VPIP AO MF LLC (the "Vivaldi Entity"), an affiliate of Vivaldi Capital Management, LLC (our "stockholder's agreement"), pursuant to which the Vivaldi Entity will agree to cause one of our directors affiliated with the Vivaldi Entity to resign from our Board of Directors should the Vivaldi Entity's beneficial ownership in us decline below a specified level. For more information about our stockholder's agreement, see "Certain Relationships and Related Party Transactions — Stockholder's Agreement."

      We will enter into a registration rights agreement with our fund investors with respect to resales of shares of our common stock received in the distribution by Angel Oak Mortgage Fund referred to above. See "Shares Eligible for Future Sale — Registration Rights."

      We will enter into a registration rights agreement with respect to any equity-based awards that we may grant to our Manager in the future under our 2021 Equity Incentive Plan. See "Shares Eligible for Future Sale — Registration Rights."

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      We and our operating partnership will enter into the management agreement with our Manager effective upon the completion of this offering.

      We expect to grant an aggregate of             shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan.

      Consequences of this Offering and our Formation Transactions

              The following chart illustrates our anticipated organizational structure immediately upon the completion of this offering and our formation transactions. Our wholly-owned subsidiary, Angel Oak Mortgage OP GP, LLC, is the sole general partner of our operating partnership. Substantially all of our assets are held by, and our operations are conducted through, our operating partnership. Upon the completion of this offering and our formation transactions, we will contribute the net proceeds of this offering to our operating partnership in exchange for OP units. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities (all percentages are calculated assuming (1) no exercise of the underwriters' over-allotment option and (2) an initial public offering price of $                 per share, which is the mid-point of the price range indicated on the front cover page of this prospectus).

    GRAPHIC


    (1)
    Represents an aggregate of                 shares of our common stock to be distributed to the partners of Angel Oak Mortgage Fund (excluding Sreeniwas Prabhu, Managing Partner and Co-Chief Executive Officer of Angel Oak Capital and the President of our Manager, Michael Fierman, the

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      Chairman of our Board of Directors and a Managing Partner and Co-Chief Executive Officer of Angel Oak Companies, and our Manager) (based on the mid-point of the price range indicated on the front cover page of this prospectus) pursuant to the terms of the limited partnership agreement of Angel Oak Mortgage Fund, following the issuance of                  shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend as part of our formation transactions. The final allocation of the             shares of our common stock among the partners of Angel Oak Mortgage Fund is subject to adjustment based upon the actual initial public offering price per share in this offering; however, the aggregate number of shares of our common stock issued by us as a stock dividend to Angel Oak Mortgage Fund will remain the same. The chart above does not reflect the holders of the 125 shares of our 12.0% Series A cumulative non-voting preferred stock, $0.01 par value per share (our "Series A preferred stock"), with an aggregate liquidation preference of $125,000.

    (2)
    Represents (a) an aggregate of                 shares of our common stock to be distributed to Sreeniwas Prabhu and Michael Fierman, in their capacities as limited partners in Angel Oak Mortgage Fund (based on the mid-point of the price range indicated on the front cover page of this prospectus), pursuant to the terms of the limited partnership agreement of Angel Oak Mortgage Fund, following the issuance of                 shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend as part of our formation transactions and (b) an aggregate of                 shares of restricted stock expected to be granted to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan. The final allocation of the             shares of our common stock among the partners of Angel Oak Mortgage Fund is subject to adjustment based upon the actual initial public offering price per share in this offering; however, the aggregate number of shares of our common stock issued by us as a stock dividend to Angel Oak Mortgage Fund will remain the same.

    (3)
    Represents an aggregate of                 shares of our common stock to be distributed to our Manager, in its capacity as the general partner of Angel Oak Mortgage Fund (based on the mid-point of the price range indicated on the front cover page of this prospectus), pursuant to the terms of the limited partnership agreement of Angel Oak Mortgage Fund, following the issuance of                 shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend as part of our formation transactions. The final allocation of the                 shares of our common stock among the partners of Angel Oak Mortgage Fund is subject to adjustment based upon the actual initial public offering price per share in this offering; however, the aggregate number of shares of our common stock issued by us as a stock dividend to Angel Oak Mortgage Fund will remain the same.

    (4)
    In connection with their investments prior to this offering, certain of our fund investors were granted rights to receive a share of our Manager's revenues received under the management agreement. Purchasers in this offering will not be entitled to receive such rights.

    (5)
    Angel Oak Mortgage, Inc. will directly own a 99.0% limited partner interest in our operating partnership and will indirectly own a 1.0% general partner interest in our operating partnership through its ownership of 100% of the interests in the general partner.

    The Management Agreement

              On September 18, 2018, we and Angel Oak Mortgage Fund entered into the pre-IPO management agreement with our Manager (the "pre-IPO management agreement"). Upon the completion of this offering and our formation transactions, the pre-IPO management agreement will terminate, and we and our operating partnership will enter into a new management agreement with our Manager that will be effective upon the completion of this offering. We refer to the new management agreement with our Manager as the "management agreement."

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              Pursuant to the management agreement, our Manager will be required to manage our business affairs in conformity with the investment guidelines that are approved and monitored by our Board of Directors. Our Manager will be subject to the supervision and oversight of our Board of Directors, the terms and conditions of the management agreement and such further limitations or parameters as may be imposed from time to time by our Board of Directors. Our Manager will be responsible for, among other things:

      the identification, selection, purchase and sale of all of our investments;

      our financing and risk management activities;

      providing us with investment advisory services; and

      providing us with a management team and appropriate personnel.

              In addition, our Manager will be responsible for our day-to-day operations and will perform (or cause to be performed) such services and activities relating to our assets and operations, including our investments and their financing, as may be necessary or appropriate.

              Term and Termination.    The initial term of the management agreement will expire on the third anniversary of the completion of this offering and will be automatically renewed for a one-year term on each anniversary date thereafter unless terminated as described below. Our independent directors will review our Manager's performance and the management fees annually and, following the initial term, the management agreement may be terminated annually by us without cause upon the affirmative vote of at least two-thirds of our independent directors based upon (1) unsatisfactory performance by our Manager that is materially detrimental to us, or (2) the determination that the compensation payable to our Manager under the management agreement is not fair (any such termination, a "termination without cause"), subject to our Manager's right to prevent termination based on unfair compensation by accepting a reduction in compensation agreed to by at least two-thirds of our independent directors. We must provide 180 days' prior written notice of any such termination. Upon a termination without cause, our Manager will be paid a termination fee. At our option and at any time during the term of the management agreement, we may also terminate the management agreement upon at least 30 days' prior written notice from our Board of Directors to our Manager, without payment of any termination fee to our Manager, upon the occurrence of a "Cause Event" (as defined in the management agreement) as determined by a majority of our independent directors. At the option of our Manager and at any time during the term of the management agreement, our Manager may terminate the management agreement if we become required to register as an investment company under the Investment Company Act, with termination deemed to occur immediately before such event, in which case we would not be required to pay a termination fee to our Manager. Furthermore, our Manager may decline to renew the management agreement by providing us with 180 days' prior written notice, in which case we would not be required to pay a termination fee to our Manager. Our Manager may also terminate the management agreement upon at least 60 days' prior written notice if we default in the performance of any material term of the management agreement and the default continues uncured for a period of 30 days after written notice to us, whereupon we would be required to pay to our Manager the termination fee.

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              Our Manager will be entitled to receive a base management fee, an incentive fee based on certain performance criteria, a termination fee in certain cases and reimbursement of certain expenses as described in the management agreement. The following table summarizes the calculation of the fees payable to our Manager pursuant to the management agreement as well as the expenses to be reimbursed to our Manager:

    Type
     Description and Method of Computation
    Base Management Fee Our Manager will be entitled to a base management fee equal to 1.50% per annum of our Equity (as defined below), calculated and payable quarterly in arrears in cash. For purposes of calculating the base management fee, our "Equity" means (1) the sum of (a) the net proceeds received by us (or, without duplication, our subsidiaries) from all issuances of our or our subsidiaries' equity securities since inception (allocated on a pro rata basis for such issuances during the calendar quarter of any such issuance), plus (b) our cumulative Core Earnings (as defined below) for the period commencing on the completion of this offering to the end of the most recently completed calendar quarter, (2) less (a) any distributions to our stockholders (or owners of our subsidiaries (other than us or any of our subsidiaries)) following the completion of this offering, (b) any amount that we or any of our subsidiaries have paid to repurchase our common stock or common equity securities of our subsidiaries following the completion of this offering and (c) any incentive fee (as described below) earned by our Manager following the completion of this offering. All items in the foregoing sentence (other than clause (1)(b)) are calculated on a daily weighted average basis. The amount of net proceeds received will be subject to the determination of our Board of Directors to the extent such proceeds are other than cash.

     

     

    Our Equity, for purposes of calculating the base management fee, could be greater or less than the amount of stockholders' equity shown on our financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP").

    Incentive Fee

     

    Our Manager will be entitled to an incentive fee, which is calculated and payable in cash with respect to each calendar quarter (or part thereof that the management agreement is in effect) in arrears in an amount, not less than zero, equal to the excess of (1) the product of (a) 15% and (b) the excess of (i) our Core Earnings for the previous 12-month period, over (ii) the product of (A) our Equity in the previous 12-month period, and (B) 8% per annum, over (2) the sum of any incentive fee earned by our Manager with respect to the first three calendar quarters of such previous 12-month period. For an example of how we calculate our Manager's incentive fee, see "Our Manager and the Management Agreement — The Management Agreement — Base Management Fees, Incentive Fees and Reimbursement of Expenses — Illustrative Incentive Fee Calculation."

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    Type
     Description and Method of Computation
      Core Earnings is a non-GAAP measure and is calculated as net income (loss) allocable to common stockholders, calculated in accordance with GAAP, excluding (1) unrealized gains on our aggregate portfolio, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other non-recurring gains or losses determined after discussions between our Manager and our independent directors and approval by a majority of our independent directors.

     

     

    For the initial four quarters following the completion of this offering, Core Earnings will be calculated on the basis of each of the previously completed quarters on an annualized basis. Core Earnings for the initial quarter following the completion of this offering will be calculated from the settlement date of this offering on an annualized basis.

     

     

    For purposes of calculating the incentive fee, to the extent we have a net loss in Core Earnings from a period prior to the previous 12-month period that has not been offset by Core Earnings in a subsequent period, such loss will continue to be included in the previous 12-month period calculation until it has been fully offset.

    Expense Reimbursement

     

    Our Manager will be entitled to reimbursement of operating expenses, including third-party expenses, incurred on our behalf.

     

     

    Our Manager will also be entitled to reimbursement for costs of the wages, salaries and benefits incurred by our Manager for our dedicated Chief Financial Officer and Treasurer and a pro rata portion of the costs of the wages, salaries and benefits incurred by our Manager with respect to a partially dedicated employee based on the percentage of such person's working time spent on matters related to us. Such employee will be a member of the whole loans team overseeing among other matters, decisions concerning selection of collateral for contribution to securitizations. The amount of any wages, salaries and benefits paid or reimbursed with respect to our dedicated Chief Financial Officer and Treasurer and the partially dedicated employee that our Manager provides to us will be subject to the approval of our compensation committee. Our Manager has informed us that Brandon Filson will serve as our dedicated Chief Financial Officer and Treasurer. Our Manager will also be entitled to reimbursement for costs of the wages, salaries and benefits incurred by our Manager for other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment personnel of our Manager or its affiliates who spend all or a portion of their time managing our affairs (our share of such costs will be based on the percentage of time devoted by such personnel to our and our subsidiaries' affairs).

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    Type
     Description and Method of Computation
      In addition, our Manager will be entitled to reimbursement for the fees, costs and expenses of legal, audit, accounting, tax, consulting, administrative and other similar services rendered to us by third parties retained by our Manager or our independent directors or, if provided by our Manager's personnel, in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm's length basis.

    Termination Fee

     

    The termination fee, payable for (1) our termination without cause of the management agreement, or (2) our Manager's termination of the management agreement upon our default in the performance of any material term of the management agreement and the default continues uncured for a period of 30 days after written notice to us, will be equal to three times the sum of (a) the average annual base management fee and (b) the average annual (or, if the period is less than 24 months, annualized) incentive fee earned by our Manager during the prior 24-month period before the date of termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination.

              In connection with their investments prior to this offering, certain of our fund investors were granted rights to receive a share of our Manager's revenues received under the management agreement. Purchasers in this offering will not be entitled to receive such rights.

              See "Our Manager and the Management Agreement — The Management Agreement" for a more detailed description of the terms of the management agreement, as well as for a description of the pre-IPO management agreement.

    Conflicts of Interest; Equitable Allocation of Opportunities

      Management Agreement

              We are dependent on our Manager for our day-to-day management. All of our officers and one of our directors also serve as employees of Angel Oak. As a result, the management agreement was negotiated between related parties, and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party. Pursuant to the management agreement, we will pay our Manager a base management fee that is tied to our Equity and an incentive fee that is based on certain performance criteria. The base management fee component, which is payable regardless of our performance, may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us. The incentive fee component may cause our Manager to place undue emphasis on the maximization of Core Earnings at the expense of other criteria, such as preservation of capital, to achieve higher incentive fees. This could result in increased risk to the value and long-term performance of our portfolio.

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      Loans Originated by Angel Oak Mortgage Lending

              Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending. Since our commencement of operations in September 2018 through December 31, 2020, a substantial portion of the target assets in our portfolio had been acquired from Angel Oak Mortgage Lending, and we expect that, in the future, a substantial portion of our portfolio will continue to consist of target assets acquired from Angel Oak Mortgage Lending. Since our commencement of operations in September 2018 through December 31, 2020, we have acquired mortgage loans from Angel Oak Mortgage Lending that had a WAC of 6.30% and a weighted average LTV of 74.9% and the borrowers of such mortgage loans had a weighted average FICO score of 715 and a weighted average DTI of 31.1%, each as of the date of origination of such mortgage loans. During that same period, Angel Oak Mortgage Lending originated mortgage loans across its platform (including the loans acquired by us) that had a WAC of 6.77% and a weighted average LTV of 75.1% and the borrowers of such mortgage loans had a weighted average FICO score of 706 and a weighted average DTI of 34.1%, each as of the date of origination of such mortgage loans. As our Manager directs our investment activities, there are conflicts of interest related to the fact that Angel Oak Mortgage Lending consists of affiliates of our Manager.

              For example, our Manager will have an incentive to favor the acquisition of non-QM loans or other target assets from Angel Oak Mortgage Lending over third-party sellers because purchasing non-QM loans or other target assets from Angel Oak Mortgage Lending would generate fees for Angel Oak Mortgage Lending (including fees payable by us and origination fees payable by the borrowers of the loans originated by Angel Oak Mortgage Lending), which would benefit Angel Oak. In addition, our acquisition of non-QM loans or other target assets from Angel Oak Mortgage Lending would allow Angel Oak Mortgage Lending to sell such non-QM loans or other target assets and obtain liquidity to make more loans, even where Angel Oak Mortgage Lending would be unable to sell the non-QM loans or other target assets on favorable terms to unaffiliated third parties in the market due to unfavorable market conditions or other reasons. Our Manager could acquire non-QM loans or other target assets on our behalf from Angel Oak Mortgage Lending even if such non-QM loans or other target assets were unsuitable for us, or we could identify better quality non-QM loans or other target assets, or obtain better pricing, from unaffiliated third parties. Although we utilize third-party pricing vendors to evaluate the fairness of the price for non-QM loans or other target assets we acquire from Angel Oak Mortgage Lending, there can be no assurance that we will purchase such non-QM loans or other target assets from Angel Oak Mortgage Lending at a fair price.

              In addition, conflicts could arise if Angel Oak Mortgage Lending breaches the applicable agreement relating to our acquisition of loans or other assets from Angel Oak Mortgage Lending, or otherwise fails to perform its obligations under such agreement, resulting in harm or damages to us. Our Manager may not require customary representations and warranties from Angel Oak Mortgage Lending concerning the non-QM loans or other target assets we acquire from them and our Manager may not seek indemnity or demand repurchase or substitution of such non-QM loans or other target assets in the event Angel Oak Mortgage Lending breaches a representation or warranty given to us. In such circumstances with unaffiliated third parties, we would be free to seek such recourse as is appropriate, including litigation. In this case, however, because of the affiliation, our Manager could have a potential conflict in determining what action to take against an affiliate, which could have a material adverse effect on us. Furthermore, our Manager may not conduct as thorough of a review of the loans acquired from Angel Oak Mortgage Lending in comparison to the review our Manager would conduct for loans acquired from unaffiliated third parties. If our Manager conducts more limited due diligence on the loans acquired from Angel Oak Mortgage Lending, such due diligence may not reveal all of the risks associated with such loans, which could materially and adversely affect us.

              Moreover, although our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending, this

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    strategy may need to adapt to changing market conditions or other factors. If investment in non-QM loans falls out of favor or otherwise becomes unattractive because of perceived risks, unfavorable pricing or otherwise, our Manager will have a conflict of interest in determining whether our strategy should continue to focus on the acquisition of non-QM loans, particularly if the origination of such loans continues to be a focus of Angel Oak Mortgage Lending. The continued pursuit of our strategy under these circumstances may result in losses. The significant majority of the loans that Angel Oak Mortgage Lending currently originates are non-QM loans. Similarly, failure to adjust our strategy may cause us to forego other attractive investment opportunities outside investments in non-QM loans. Our Manager will have a conflict in determining whether to adjust our strategy and to pursue investments in other types of target assets that may be more attractive even if Angel Oak Mortgage Lending continues to originate non-QM loans.

              We have purchased RMBS, and expect to continue to purchase RMBS or CMBS, that are collateralized by loans originated by Angel Oak Mortgage Lending, and our portfolio may consist of a significant amount of such securities. Certain affiliates of our Manager may receive benefits, including compensation, for their activities related to the creation of the securitization and the issuance and sale of such securities. We will also bear a portion of the expense incurred in connection with the securitization vehicle to which we sell the loans we have acquired. Such expenses include, but are not limited to, the costs and expenses related to structuring the securitization vehicle and the transactions related to the sale of the loans by us to the securitization vehicle.

              Angel Oak has in place policies and procedures that we believe are reasonably designed to facilitate arm's length transactions between us and Angel Oak Mortgage Lending and any other affiliates with respect to non-QM loans and other target assets purchased from Angel Oak Mortgage Lending or other affiliates. Additionally, our affiliated transactions committee, which will be comprised of two of our independent directors, must approve, among other matters, our acquisition of any non-QM loans and any other target assets we acquire from Angel Oak Mortgage Lending or other affiliate of our Manager. However, there can be no assurance that such policies and procedures will be successful and we could purchase loans from Angel Oak Mortgage Lending at less favorable prices from what we could have obtained from unaffiliated third parties and we could ultimately suffer losses as a result.

      Other Angel Oak Managed Entities

              Angel Oak currently advises, and in the future expects to continue to advise, other entities that may have investment objectives and strategies similar, in whole or in part, to ours and may use the same or similar strategies to those we employ. For example, Angel Oak has previously formed a private REIT as well as other funds that invest in residential mortgage loans, and may raise additional investment vehicles in the future, including entities formed to make investments that we could be precluded or materially limited from making because of laws or regulations applicable to us. Angel Oak is not restricted in any way from sponsoring or accepting capital from new entities, even for investing in asset classes or strategies that are similar to, or overlapping with, our asset classes or strategies. The existence of such multiple managed entities may create conflicts of interest, including, without limitation, with respect to the allocation of investment opportunities between us and other managed entities. See "— Allocation of Investment Opportunities" below. However, pursuant to a letter agreement with one of our fund investors, our Manager has agreed that, other than us, neither our Manager nor Angel Oak Capital, nor any of their respective affiliates will, and they will cause their affiliates not to, manage or sponsor any U.S. publicly traded REIT that invests primarily in residential mortgage assets for so long as we are managed by our Manager, Angel Oak Capital or any of their respective affiliates or, if earlier, until the date on which such fund investor no longer holds an interest in us. In addition, we may make an investment that may be pari passu, senior or junior in ranking to an investment made by another managed entity, and actions taken by such managed entity with respect to such investment may not be in our best interests, and vice versa. Furthermore, such activities may involve substantial time and resources of Angel Oak, including our Manager.

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      Allocation of Investment Opportunities

              Although Angel Oak, including our Manager, may manage investments on behalf of a number of managed entities, including us, investment decisions and allocations will not necessarily be made in parallel among us and these other managed entities. Investments made by us may not, and are not intended in all cases to, replicate the investments, or the investment methods and strategies, of other entities managed by Angel Oak, including our Manager. Nevertheless, Angel Oak, including our Manager, from time to time may elect to apportion major or minor portions of the investments to be made by us among other entities that they manage, and vice versa.

              When allocating investment opportunities among us and one or more other managed entities, Angel Oak Capital allocates such opportunities pursuant to its written investment allocation policy. Angel Oak Capital's written investment allocation policy allocates investment opportunities based on each managed entity's guidelines, the strategy and available cash of Angel Oak managed entities, market supply and other factors. Target allocations for each managed entity are established by Angel Oak Capital's portfolio management team prior to the execution of any aggregated trade. In the event an aggregated trade is partially filled, Angel Oak's managed entities will generally receive a pro rata share of the executed trade based upon the target allocation set by Angel Oak Capital's portfolio management team.

              For loans acquired from Angel Oak Mortgage Lending, each week Angel Oak Capital receives a loan tape from Angel Oak Mortgage Lending. The loan tape is reviewed to ensure compliance with our and other Angel Oak managed entities' investment guidelines. If any exceptions are found, the loan is further reviewed to ensure there are accompanying compensating factors. Following review of the loan tape, a custodial review is performed to ensure necessary documentation exists or is provided. Concurrently with the custodial review, loans are priced based on the current rate sheet and an allocation among Angel Oak managed entities is determined. Angel Oak's portfolio management team establishes a monthly target allocation first by loan type and then by loan size. Loans from Angel Oak Mortgage Lending that fit the investment guidelines of Angel Oak's managed entities, including us, are allocated first to such managed entities. Each round of loan purchases is then allocated to each participating managed entity based on the target allocation (or as closely as possible given available loan sizes) in order to avoid one managed entity from being fully allocated ahead of any other managed entity. Loans are allocated on an alternating basis to each eligible managed entity. Angel Oak Capital's compliance team approves each loan allocation and our affiliated transactions committee, which will be comprised of two of our independent directors, must approve, among other matters, our acquisition of any non-QM loans and any other target assets we acquire from Angel Oak Mortgage Lending or other affiliate of our Manager.

              Accordingly, not all investments which are consistent with our investment objective and strategies are or will be presented to us. There is no assurance that any such conflicts arising out of the foregoing will be resolved in our favor. Angel Oak Capital is entitled to amend its investment allocation policy at any time without prior notice to us or our consent.

      Service Providers

              Our Manager may engage affiliated service providers, including affiliates that act as the servicer for the loans in our portfolio. Such relationships may influence our Manager in deciding whether to select such service providers. Our Manager's affiliates receive benefits, including compensation, for these activities, although we believe that the use of such affiliates is in the best interests of our stockholders. Additionally, affiliated service providers will not have the same independence with respect to the performance of their duties to us as an unaffiliated service provider. For example, Angel Oak Mortgage Solutions acted as the servicing administrator in the securitization transactions for AOMT 2019-2, AOMT 2019-4 and AOMT 2019-6 and Angel Oak Home Loans acted as the servicing administrator for AOMT 2020-3, and such entities are responsible for servicing the securitized mortgage loans pursuant to

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    separate pooling and servicing agreements. Under each pooling and servicing agreement, Angel Oak Mortgage Solutions or Angel Oak Home Loans, as applicable, is entitled to receive a servicing administration fee as compensation for its activities in its capacity as a servicing administrator. The use of affiliated service providers may impair our ability to obtain the most favorable terms with respect to such services and transactions, which could materially and adversely affect us.

      Management

              Other than our dedicated Chief Financial Officer and Treasurer that our Manager provides to us, the officers of our Manager and its affiliates devote as much time to us as our Manager deems appropriate; however, these officers may have conflicts in allocating their time and services among us and Angel Oak's other managed entities. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from our Manager and Angel Oak employees, other entities that Angel Oak manages will likewise require greater focus and attention, placing our Manager and Angel Oak's resources in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed or if Angel Oak did not act as a manager or advisor for other entities.

      Securitizations

              We have participated in several securitization transactions, and in the future intend to continue to participate in securitization transactions, in which other managed entities of Angel Oak also contribute mortgage loans or other assets. There can be no assurance that the valuation of the assets that we contribute to any such securitization will not be understated or the assets that such other managed entities contribute will not be overstated, resulting in less cash proceeds or securities issued by the securitization vehicle to us or more cash proceeds or securities issued by the securitization vehicle to such managed entities than would otherwise be the case. In addition, other Angel Oak managed entities may contribute assets to securitizations that we also contribute assets to, potentially exposing us to assets that do not fit within our strategy or that we would not have otherwise acquired directly.

              AOMT's securitizations are typically structured with a two- or three-year non-call period for the securities issued in the securitization. After such period has ended, AOMT has the option to call the securitization at any point. AOMT would consider exercising this option if the financing marketplace is more attractive, or if the underlying asset values have increased. AOMT may choose to exercise its option to call the securitization, for the benefit of another Angel Oak managed entity, without taking into consideration our interests, and we may be unable to reinvest the proceeds we receive from any such call option for some period of time and such proceeds may be reinvested by us in assets yielding less than the yields on the securities that were called.

      Material Non-Public Information

              We, directly or through Angel Oak, may obtain material non-public information about the investments in which we have invested or may invest. If we do possess material non-public information about such investments, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action with respect to such investments. Our Manager's and Angel Oak's management of other managed entities could create a conflict of interest to the extent our Manager or Angel Oak is aware of material non-public information concerning potential investment decisions. In addition, this conflict may limit the freedom of our Manager to make potentially profitable investments, which could have an adverse effect on our operations. These limitations imposed by access to material non-public information could therefore materially and adversely affect us.

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      Officers and Directors

              Currently, all of our officers and one of our directors also serve as employees of Angel Oak and we compete with other Angel Oak managed entities for access to these individuals, other than with respect to our Chief Financial Officer and Treasurer, who is dedicated to us. Further, our charter provides that, to the maximum extent permitted from time to time by Maryland law, if any of our directors or officers who is also an officer, director, employee, agent, partner, manager, member or stockholder of Angel Oak acquires knowledge of a potential business opportunity, we renounce any potential interest or expectation in, or right to be offered or to participate in, such business opportunity, unless such director or officer became aware of such business opportunity as a direct result of his or her capacity as our director or officer and (1) we are financially able to undertake such business opportunity, (2) we are not prohibited by contract or applicable law from pursuing or undertaking such business opportunity, (3) such business opportunity, from its nature, is in line with our business, (4) such business opportunity is of practical advantage to us and (5) we have an interest or reasonable expectancy in such business opportunity (a "Retained Opportunity"). Accordingly, except for Retained Opportunities, to the maximum extent permitted from time to time by Maryland law and our charter, none of our directors or officers who is also an officer, director, employee, agent, partner, manager, member or stockholder of Angel Oak is required to present, communicate or offer any business opportunity to us and can hold and exploit any business opportunity, or direct, recommend, offer, sell, assign or otherwise transfer such business opportunity to any person or entity other than us.

              We have not adopted a policy that expressly prohibits our directors, officers, security holders or affiliates from having a direct or indirect pecuniary interest in any asset to be acquired or disposed of by us or any of our subsidiaries or in any transaction to which we or any of our subsidiaries is a party or has an interest, nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct and ethics contains a conflict of interest policy that prohibits our directors, officers and employees, as well as employees of our Manager who provide services to us, from engaging in any transaction that involves an actual or apparent conflict of interest with us, absent approval by our Board of Directors or except as provided in the management agreement. In addition, nothing in the management agreement binds or restricts our Manager or any of its affiliates, officers or employees from buying, selling or trading any securities or commodities for their own accounts or for the accounts of others for whom our Manager or any of its affiliates, officers or employees may be acting.

    Our Tax Status

              We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. Commencing with our taxable year ended December 31, 2019, we believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Code. Our qualification as a REIT, and maintenance of such qualification, will depend on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our stock.

              As a REIT, we generally are not subject to U.S. federal income tax on the REIT taxable income that we currently distribute to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute annually at least 90% of their REIT taxable income to their stockholders. If we fail to qualify as a REIT in any calendar year and do not qualify for certain statutory relief provisions, our income would be subject to U.S. federal income tax, and we would likely be precluded from qualifying for treatment as a REIT until the fifth calendar year following the year in which we fail to qualify. Accordingly, our failure to qualify as a REIT could have a material adverse effect on our results of operations and amounts available for distribution to our stockholders. Even if we qualify as a REIT, we may still be subject to certain U.S. federal, state

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    and local taxes on our income and assets and to U.S. federal income and excise taxes on our undistributed income. In addition, subject to maintaining our qualification as a REIT, a significant portion of our business may be conducted through, and a significant portion of our income may be earned in, one or more taxable REIT subsidiary ("TRSs") that are subject to corporate income taxation.

              In connection with this offering of shares of our common stock, we will receive an opinion from Sidley Austin LLP to the effect that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended method of operation will enable us to meet the requirements for qualification and taxation as a REIT.

    Our Distribution Policy

              Following the completion of this offering, we intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at the regular corporate rate to the extent that it annually distributes less than 100% of its REIT taxable income. As a result, in order to satisfy the requirements for us to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of at least 100% of our REIT taxable income to holders of our common stock out of assets legally available therefor.

              Distributions to our common stockholders, if any, will be authorized by our Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including our historical and projected results of operations, cash flows and financial condition, our financing covenants, funding or margin requirements under financing arrangements, maintenance of our REIT qualification, applicable provisions of the Maryland General Corporation Law (the "MGCL"), the terms of any class or series of our stock, including our Series A preferred stock, and such other factors as our Board of Directors deems relevant.

              To the extent that in respect of any calendar year cash available for distribution is less than our cash flows from operating activities, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured. In addition, we may choose to make a portion of a required distribution in the form of a taxable stock dividend to preserve our cash balance.

              Currently, we have no intention to use any of the net proceeds of this offering to make distributions to holders of our common stock or to make distributions to holders of our common stock using shares of our common stock. For additional details, see "Use of Proceeds."

              Our current financing arrangements contain, and our future financing arrangements will contain, covenants (financial and otherwise) affecting our ability, and, in certain cases, our subsidiaries' ability, to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our stockholders and otherwise affect our operating policies.

    Restrictions on Ownership and Transfer

              Due to limitations on the concentration of ownership of REIT stock imposed by the Code, and subject to certain exceptions, our charter provides that no person may beneficially or constructively own (1) shares of common stock in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock or (2) shares of stock in excess of 9.8% in value of the outstanding shares of our stock. See "Description of Stock — Restrictions on Ownership and Transfer."

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              Our charter provides that our Board of Directors, subject to certain limits, upon receipt of such representations and agreements as our Board of Directors may require, may prospectively or retroactively exempt a person from either or both of the ownership limits and establish a different limit on ownership for such person.

              Our charter also prohibits any person from, among other matters:

      beneficially or constructively owning shares of our stock if such ownership would result in our being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT; and

      transferring shares of our stock if such transfer would result in shares of our stock being owned by fewer than 100 persons.

              Our charter also provides that any ownership or purported transfer of shares of our stock in violation of the foregoing restrictions will result in the shares owned or transferred in such violation being automatically transferred to a trust for the exclusive benefit of a charitable beneficiary and the purported owner or transferee acquiring no rights in such shares, except if any transfer of our stock would result in shares of our stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code), then any such purported transfer will be void and of no force or effect and the intended transferee will acquire no rights in the shares. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent a violation of the applicable restriction on ownership and transfer of our stock, then the transfer of the number of shares that otherwise would cause any person to violate the above restrictions will be void and of no force or effect, regardless of any action or inaction by our Board of Directors, and the intended transferee will acquire no rights in the shares.

    Our Exclusion From Regulation Under the Investment Company Act

              We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act.

              Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer's total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the "40% test." Excluded from the term "investment securities," among other things, are U.S. Government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exclusion from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

              Upon the completion of this offering and our formation transactions, we will be organized as a holding company and will conduct our business through our operating partnership's wholly-owned and majority-owned subsidiaries. Both we and our operating partnership intend to conduct our respective operations so that they comply with the 40% test. The securities issued to our operating partnership by any wholly-owned or majority-owned subsidiaries that it may form that are excluded from the definition of "investment company" based on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other investment securities our operating partnership may own, may not have a value in excess of 40% of the value of our operating partnership's total assets on an unconsolidated basis, exclusive of U.S. Government securities and cash items. We will monitor our operating partnership's holdings to ensure continuing and ongoing compliance with this test. In addition, we believe that

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    neither we nor our operating partnership will be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because neither we nor our operating partnership will engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through our operating partnership's wholly-owned or majority-owned subsidiaries, we and our operating partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the real estate finance business of purchasing or otherwise acquiring mortgage loans and other interests in real estate.

              We expect that most of our investments will be held by our operating partnership's wholly-owned or majority-owned subsidiaries and that most of these subsidiaries will rely on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the Investment Company Act, which is available for entities "primarily engaged in [the business of] . . . purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion, as interpreted by the SEC staff, generally requires that at least 55% of a subsidiary's portfolio must be comprised of qualifying real estate assets and at least 80% of its portfolio must be comprised of qualifying real estate assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets).

              For purposes of the exclusion provided by Section 3(c)(5)(C), we classify our investments based in large measure on no-action letters issued by the SEC staff and other SEC interpretive guidance and, in the absence of SEC guidance, on our view of what constitutes a qualifying real estate asset and a real estate-related asset. Although we intend to monitor our portfolio on a regular basis, there can be no assurance that we will be able to maintain this exclusion from registration for each of these subsidiaries.

              As described elsewhere in this prospectus, we may finance our operations through securitization transactions. In such transactions, one of our operating partnership's subsidiaries would contribute non-QM loans to a securitization vehicle in exchange for debt securities issued by the securitization vehicle ("Securitization Securities"), as well as cash. To the extent a securitization transaction complies with no-action letters issued by the SEC staff, for purposes of Section 3(c)(5)(C) we intend to treat Securitization Securities received in such securitizations in the same manner that we treated the non-QM loans that we contributed to the securitization (i.e., as qualifying real estate assets). To the extent a securitization transaction does not comply with no-action letters issued by the SEC staff, for purposes of Section 3(c)(5)(C) we intend to treat Securitization Securities received in such securitizations, including those issued by AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and AOMT 2020-3, as real estate-related assets in the absence of additional guidance from the SEC staff with respect to such securitization.

              Qualification for exclusion from registration under the Investment Company Act will limit our ability to make certain investments and could require us to restructure our operations, sell certain of our assets or abstain from the purchase of certain assets, which could have an adverse effect on our financial condition and results of operations. In addition, complying with the tests for exclusion from registration could restrict the time at which we can acquire and sell assets. See "Risk Factors — Risks Related to Our Company — Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations."

    Implications of Being an Emerging Growth Company

              We qualify as an "emerging growth company," as defined in the Jumpstart our Business Startups Act of 2012 (the "JOBS Act"). An emerging growth company may take advantage of specified reduced reporting requirements and are relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company, among other things:

      we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act");

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      we are permitted to provide less extensive disclosure about our executive compensation arrangements; and

      we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements.

              We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues (subject to adjustment for inflation), have more than $700.0 million in market value of shares of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt securities over a three-year period. We may choose to take advantage of some but not all of these reduced burdens.

              In addition, the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in the Securities Act of 1933, as amended (the "Securities Act"), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to "opt out" of this extended transition period and, as a result, we will comply with new or revised accounting standards on or prior to the relevant dates on which adoption of such standards is required for all public companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

    Summary Risk Factors

              An investment in shares of our common stock involves risks. You should consider carefully the risks discussed below and described more fully along with other risks under "Risk Factors" in this prospectus before investing shares of our common stock.

      The COVID-19 pandemic, measures intended to prevent its spread and government actions to mitigate its economic impact have caused, and are expected to continue to cause, severe and unprecedented disruptions in the U.S. and global economies and financial markets, and had an adverse effect on us in the past and could have a material adverse effect on us in the future.

      We are dependent on our Manager and certain key personnel of Angel Oak that are or will 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.

      There are conflicts of interest in our relationship with Angel Oak, including our Manager, and we may compete with existing and future managed entities of Angel Oak, which may present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders.

      We rely on Angel Oak Mortgage Lending to source non-QM loans and other target assets for acquisition by us and it is under no contractual obligation to sell to us any loans that it originates.

      Our 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.

      The management agreement with our Manager was not negotiated on an arm's-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate. Our Manager's liability is limited under the management agreement, and we have agreed to indemnify our Manager against certain liabilities.

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      Our 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.

      Our 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.

      We have not previously included secondary market purchases of our target assets as part of our investment strategy and there can be no assurance that we will be successful in acquiring our target assets through the secondary market on attractive terms or at all.

      Difficult conditions in the residential mortgage and residential real estate markets as well as general market concerns may adversely affect the value of residential mortgage loans, including non-QM loans, and other target assets in which we invest.

      The non-QM loans in which we invest are subject to less stringent underwriting guidelines than QM loans and could experience substantially higher rates of delinquencies, defaults and foreclosures than those experienced by QM loans.

      Angel Oak Mortgage Lending is subject to extensive licensing requirements and regulation, which could materially and adversely affect us.

      Currently, we are focused on acquiring and investing in non-QM loans, which may subject us to legal, regulatory and other risks, which could materially and adversely affect us.

      Prepayment rates may adversely affect the value of our portfolio.

      Our investment in lower rated non-Agency RMBS resulting from the securitization of our assets or otherwise, exposes us to the first loss on the mortgage assets held by the securitization vehicle. Additionally, the principal and interest payments on non-Agency RMBS are not guaranteed by any entity, including any government entity or GSE, and therefore are subject to increased risks, including credit risk.

      We 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.

      We may change our strategy, investment guidelines, hedging strategy, and asset allocation, operational and management policies without notice or stockholder consent, which could materially and adversely affect us.

      The failure of our third-party servicers to service our investments effectively would materially and adversely affect us.

      Mortgage 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.

      Certain actions by the U.S. Federal Reserve could materially and adversely affect us.

      We could be subject to liability for potential violations of predatory lending laws, including with respect to our non-QM loans, which could have a material adverse effect on us.

      We 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.

      Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations.

      We may incur significant debt, which will subject us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur.

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      Our 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.

      We may be unable to profitably execute securitization transactions, which could materially and adversely affect us.

      Market conditions and other factors may affect our ability to securitize assets, which could increase our financing costs and materially and adversely affect us.

      Interest rate fluctuations could increase our financing costs, which could materially and adversely affect us.

      Upon the completion of this offering and our formation transactions, our significant stockholders, including the MS Entity, the DK Entity and the Vivaldi Entity, and their respective affiliates, will have significant influence over us and their actions might not be in your best interest as a stockholder.

      Legislative or other actions affecting REITs could materially and adversely affect us.

      Our 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.

    Our Offices

              Our principal executive offices are located at 3344 Peachtree Road NW, Suite 1725, Atlanta, Georgia 30326. Our telephone number is (404) 953-4900 and our website is www.angeloakreit.com. The offices of Angel Oak, including our Manager, are located at the same address. Information on our website is not incorporated into this prospectus.

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    THE OFFERING

    Shares of common stock offered by us          shares (plus up to an additional         shares that we may issue and sell upon the exercise of the underwriters' over-allotment option).

    Shares of common stock outstanding after this offering

     

             shares(1)

    Use of proceeds

     

    We estimate that the net proceeds we will receive from this offering will be approximately $         million (or approximately $         million if the underwriters exercise their over-allotment option in full), assuming an initial public offering price of $         per share, which is the mid-point of the price range indicated on the front cover page of this prospectus, excluding the underwriting discounts and commissions and offering expenses, each of which Angel Oak Capital has agreed to pay. Upon the completion of this offering and our formation transactions, we will contribute the net proceeds of this offering to our operating partnership in exchange for OP units.

     

     

    Our operating partnership intends to deploy the net proceeds received from us to acquire non-QM loans and other target assets primarily sourced from Angel Oak Mortgage Lending or other target assets through the secondary market in a manner consistent with our strategy and investment guidelines described in this prospectus, and for general corporate purposes. See "Use of Proceeds."

    Distribution Policy

     

    Following the completion of this offering, we intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at the regular corporate rate to the extent that it annually distributes less than 100% of its REIT taxable income. As a result, in order to satisfy the requirements for us to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of at least 100% of our REIT taxable income to holders of our common stock out of assets legally available therefor.

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      Distributions to our common stockholders, if any, will be authorized by our Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including our historical and projected results of operations, cash flows and financial condition, our financing covenants, funding or margin requirements under financing arrangements, maintenance of our REIT qualification, applicable provisions of the MGCL, the terms of any class or series of our stock, including our Series A preferred stock, and such other factors as our Board of Directors deems relevant. We cannot assure you that we will make any distributions to our stockholders. For more information, see "Distribution Policy."

    Ownership and transfer restrictions

     

    To assist us in qualifying as a REIT, among other purposes, our charter provides that no person may beneficially or constructively own (1) shares of common stock in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock or (2) shares of stock in excess of 9.8% in value of the outstanding shares of our stock. In addition, our charter contains various other restrictions on the ownership and transfer of shares of our stock. See "Description of Stock — Restrictions on Ownership and Transfer."

    10b5-1 Purchase Plan

     

    Prior to the completion of this offering, we intend to enter into an agreement (the "10b5-1 Purchase Plan") with Wells Fargo Securities, LLC, one of the underwriters in this offering. Pursuant to the 10b5-1 Purchase Plan, Wells Fargo Securities, LLC, as our agent, will buy in the open market up to $25.0 million in shares of our common stock in the aggregate during the period beginning four full calendar weeks following the completion of this offering and ending 12 months thereafter or, if sooner, the date on which all the capital committed to the 10b5-1 Purchase Plan has been exhausted. The 10b5-1 Purchase Plan will require Wells Fargo Securities, LLC to purchase for us shares of our common stock when the market price per share is a specified percentage below the book value. The purchase of shares of our common stock by Wells Fargo Securities, LLC for us pursuant to the 10b5-1 Purchase Plan is intended to satisfy the conditions of Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and will otherwise be subject to applicable law, including Regulation M under the Securities Act, which may prohibit purchases under certain circumstances. Under the 10b5-1 Purchase Plan, Wells Fargo Securities, LLC will increase the volume of purchases made for us as the market price per share of our common stock declines certain specified percentages below the book value, subject to volume restrictions imposed by the 10b5-1 Purchase Plan and Rule 10b-18 under the Exchange Act. For purposes of the 10b5-1 Purchase Plan, "book value" means, as of the date of any purchase, the book value

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      per share of our common stock as of the end of the most recent quarterly period for which financial statements are available, calculated in accordance with GAAP and adjusted to give effect to any subsequent cash distribution made to holders of our common stock from and after the record date for such distribution. Purchases of shares of our common stock by Wells Fargo Securities, LLC for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market. See "Risk Factors — Risks Related to Our Common Stock and this Offering — Purchases of our common stock by Wells Fargo Securities,  LLC for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market."

    NYSE symbol

     

    "AOMR"

    Risk factors

     

    Investing in our common stock involves risks. You should carefully read and consider the information set forth under "Risk Factors" beginning on page 47 of this prospectus and all other information in this prospectus before making a decision to invest in our common stock.

    (1)
    Includes (a)              shares of our common stock to be issued in this offering (based on the mid-point of the price range indicated on the front cover page of this prospectus) and (b)              shares of our common stock to be issued in connection with our formation transactions, including the issuance of             shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend as part of our formation transactions and the expected grant of             shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan. Excludes (i) up to an additional             shares that we may issue and sell upon the exercise of the underwriters' over-allotment option and (ii) up to             shares of our common stock reserved for issuance under our 2021 Equity Incentive Plan. See "Management — 2021 Equity Incentive Plan."

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    SUMMARY SELECTED FINANCIAL AND OTHER DATA

              You should read the following summary selected financial and other data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our unaudited and audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. The selected consolidated income statement information for the years ended December 31, 2020 and 2019 and the selected consolidated balance sheet information as of December 31, 2020 and 2019 have been derived from our audited consolidated financial statements, included elsewhere in this prospectus.

              Additionally, our results of operations presented herein do not reflect the expenses typically associated with being a public company, including the payment of increased directors' fees for our independent directors and the expenses incurred in complying with the reporting and other requirements of the Exchange Act, the payment of a base management fee and an incentive fee to our Manager as a result of differences in the way fees and expense reimbursements are calculated under the management agreement as compared to the pre-IPO management agreement, equity compensation expense and increased legal and accounting fees. Additionally, pursuant to the management agreement, we will be required to reimburse our Manager for its operating expenses, including third-party expenses, incurred on our behalf and our Manager will also be entitled to reimbursement for costs of the wages, salaries and benefits incurred by our Manager for our dedicated Chief Financial Officer and Treasurer and a pro rata portion of the costs of the wages, salaries and benefits incurred by our Manager with respect to a partially dedicated employee based on the percentage of such person's working time spent on matters related to us. Our results of operations subsequent to this offering will reflect these expenses. Moreover, prior to the completion of this offering, we have avoided registration under the Investment Company Act, among other things, on the basis that all of our holders are "qualified purchasers," as defined under the Investment Company Act. Subsequent to the completion of this offering, this will no longer be the case and we will have to conduct our business and comprise our portfolio of assets in a manner that enables us to avoid such registration. See "Risk Factors — Risks Related to Our Company — Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations." Additionally, the COVID-19 pandemic is expected to continue to adversely affect us. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — COVID-19 Impact." Accordingly, our results of operations presented herein are not indicative of the results of operations that we expect to realize subsequent to this offering.

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    (dollars in thousands, except share and per share data)
     Year Ended
    December 31,
    2020
     Year Ended
    December 31, 2019
     

    OPERATING DATA:

           

    Interest income, net

           

    Interest income

     $40,820 $19,719 

    Interest expense

      7,499  7,944 

    Net interest income

     $33,321 $11,775 

    Realized and unrealized gains (losses), net

           

    Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans

      (20,793) (854)

    Net unrealized gain (loss) on derivative contracts and mortgage loans

      (2,144) 876 

    Total realized and unrealized gains (losses), net

     $(22,937)$22 

    Expenses

           

    Operating and investment expenses

     $2,036 $1,928 

    Operating expenses incurred with affiliate

      1,742  1,410 

    Securitization costs

      2,527  2,426 

    Management fee incurred with affiliate

      3,343  890 

    Total operating expenses

     $9,648 $6,654 

    Net income

     $736 $5,143 

    Preferred dividends

      (15) (14)

    Net income allocable to common stockholder

     $721 $5,129 

    Per Share Information:

           

    Net income allocable to common stockholder per share of our common stock, basic and diluted

     $721 $5,129 

    Pro forma for shares issued in our formation transactions(1)

     $  $  

    Dividends declared per share of our common stock

     $ $ 

    Pro forma for shares issued in our formation transactions(1)

     $  $  

    Weighted average number of shares of our common stock outstanding, basic and diluted

      1,000  1,000 

    Pro forma for shares issued in our formation transactions(1)

           

    Selected Other Data:

           

    Core Earnings(2)

     $2,880 $4,242 

    Core Earnings per share of our common stock, basic and diluted

     $2,880 $4,242 

    Pro forma for shares issued in our formation transactions(1)

     $  $  

    Return on average equity(3)

      0.3% 8.8%

    Core return on average equity(2)

      1.7% 7.4%

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    (dollars in thousands, except share and per share data)
     December 31,
    2020
     December 31, 2019 

    BALANCE SHEET DATA:

           

    Total assets

     $509,656 $459,090 

    Total liabilities

     $261,347 $364,227 

    Total stockholders' equity

     $248,309 $94,863 

    Preferred stock

     $101 $101 

    Total stockholder's equity, net of preferred stock

     $248,208 $94,762 

    Number of shares outstanding at period end

      1,000  1,000 

    Pro forma for shares issued in our formation transactions(1)

           

    Book value per share

     $248,208 $94,762 

    Pro forma for shares issued in our formation transactions(1)

     $  $          

    Ratio Data:

      
     
      
     
     

    Total debt to total stockholders' equity

      1.05x  3.82x 

    (1)
    Reflects (a) the issuance of an aggregate of                 shares of our common stock in a stock dividend to Angel Oak Mortgage Fund, as our sole common stockholder prior to this offering, and (b) the grant of an aggregate of                 shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan.

    (2)
    Core Earnings is a non-GAAP measure and is defined as net income (loss) allocable to common stockholders, calculated in accordance with GAAP, excluding (a) unrealized gains on our aggregate portfolio, (b) impairment losses, (c) extinguishment of debt, (d) non-cash equity compensation expense, (e) the incentive fee earned by our Manager, (f) realized gains or losses on swap terminations and (g) certain other non-recurring gains or losses determined after discussions between our Manager and our independent directors and approval by a majority of our independent directors. As defined, Core Earnings include interest income and expense as well as realized losses on interest rate futures or swaps used to hedge interest rate risk and other expenses. We believe that the presentation of Core Earnings provides investors with a useful measure to facilitate comparisons of financial performance between our REIT peers, but has important limitations. We believe Core Earnings as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, Core Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Core Earnings may not be comparable to similar measures presented by other REITs.

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              The following table provides a reconciliation of net income allocable to common stockholder, calculated in accordance with GAAP, to Core Earnings:

    (dollars in thousands, except share and per share data)
     Year Ended
    December 31,
    2020
     Year Ended
    December 31, 2019
     

    Net income allocable to common stockholder

     $721 $5,129 

    Adjustments:

           

    Net other-than-temporary credit impairment losses

         

    Net unrealized (gains) losses on derivatives

      257  (937)

    Net unrealized (gains) losses on residential loans

      1,371  54 

    Net unrealized (gains) losses on commercial real estate loans

      517   

    Net unrealized (gains) losses on financial instruments at fair value

      14  (4)

    (Gains) losses on extinguishment of debt

         

    Non-cash equity compensation expense

         

    Incentive fee earned by our Manager

         

    Realized (gains) losses on terminations of interest rate swaps

         

    Total other (gains) losses

         

    Core Earnings

     $2,880 $4,242 

    Weighted average number of shares of our common stock outstanding, basic and diluted

      1,000  1,000 

    Pro forma for shares issued in our formation transactions(A)

           

    Core Earnings per share of our common stock, basic and diluted

     $2,880 $4,242 

    Pro forma for shares issued in our formation transactions(A)

     $  $  

    (A)
    Reflects (i) the issuance of an aggregate of                 shares of our common stock in a stock dividend to Angel Oak Mortgage Fund, as our sole common stockholder prior to this offering, and (ii) the grant of an aggregate of                 shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan.

      Core return on average equity is a non-GAAP measure and is defined as annual or annualized Core Earnings divided by average total stockholders' equity. We believe that the presentation of core return on average equity provides investors with a useful measure to facilitate comparisons of financial performance between our REIT peers, but has important limitations. Additionally, we believe core return on average equity provides investors with additional detail on the Core Earnings generated by our invested equity capital. We believe core return on average equity as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, core return on average equity should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating core 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 core return on average equity may not be comparable to

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      similar measures presented by other REITs. Set forth below is our computation of core return on average equity for the periods presented:

    (dollars in thousands)
     Year Ended
    December 31,
    2020
     Year Ended
    December 31,
    2019
     

    Core Earnings

     $2,880 $4,242 

    Average total stockholders' equity

     $171,586 $57,682 

    Core return on average equity

      1.7% 7.4%
    (3)
    Our return on average equity was calculated by dividing net income by average stockholders' equity.

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    RISK FACTORS

              An investment in our common stock involves significant risks. Before making a decision to invest in our common stock, you should carefully consider the following risks in addition to the other information contained in this prospectus. The risks discussed in this prospectus can materially adversely affect our business, financial condition, liquidity, results of operations and prospects and our ability to make distributions to our stockholders (which we refer to collectively as "materially and adversely affecting us" or having "a material adverse effect on us," and comparable phrases). This could cause the market price of our common stock to decline significantly, and you could lose all or part of your investment in our common stock. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled "Special Note Regarding Forward-Looking Statements."

    Risks Related to the COVID-19 Pandemic

    The COVID-19 pandemic, measures intended to prevent its spread and government actions to mitigate its economic impact have caused, and are expected to continue to cause, severe and unprecedented disruptions in the U.S. and global economies and financial markets, and had an adverse effect on us in the past and could have a material adverse effect on us in the future.

              In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. COVID-19 has since spread globally, including every state in the United States and in cities and regions where our corporate headquarters and/or properties that secure our investments are located. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and since then, numerous countries, including the United States, have declared national emergencies with respect to COVID-19.

              The COVID-19 pandemic is causing severe and unprecedented disruptions to the U.S. and global economies and has contributed to volatility and negative pressure in financial markets. The outbreak has led governments and other authorities around the world to impose or re-impose measures intended to control its spread, including restrictions on freedom of movement, such as quarantine and "stay-at-home" orders, restrictions on travel and transport, school closures, limits on the operations of non-essential businesses and other workforce pressures.

              In response to the pandemic, the U.S. Government has taken various actions to support the economy and the continued functioning of the financial markets, including initiatives applicable to a significant number of mortgage loans. For example, the U.S. Department of Housing and Urban Development authorized the Federal Housing Administration to implement a 60-day mortgage moratorium on foreclosures and evictions on single family homeowners unable to pay their Federal Housing Administration-backed mortgages. In addition, the Federal Housing Finance Agency instructed Fannie Mae and Freddie Mac to establish forbearance programs to permit certain borrowers under Federal Housing Administration-backed mortgages to postpone or delay mortgage payments for as long as one year. Further, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law, which provides approximately $2 trillion in financial assistance to individuals and businesses resulting from the outbreak of COVID-19, including mortgage loan forbearance and modification programs to qualifying borrowers who have difficulty making their loan payments. Moreover, although this initiative is not applicable to non-QM loans, the U.S. Federal Reserve has announced its commitment to purchase unlimited amounts of U.S. Treasuries, mortgage-backed securities, municipal bonds and other assets. Additionally, various U.S. state governments have implemented certain mortgage relief measures, including the forbearance of mortgage payments and moratoriums on foreclosures and evictions on single family homeowners. There can be no assurance as to how, in the long term, these and other actions by the U.S. Government and various U.S. state governments will affect the efficiency, liquidity and stability of the financial and mortgage markets.

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              The impact of the COVID-19 pandemic, measures to prevent its spread and government actions to mitigate its impact had an adverse effect on us in the past and may continue to adversely affect us as long as the outbreak persists and potentially even longer. Although it is difficult to predict the magnitude of the business and economic implications, the COVID-19 outbreak has affected, and may continue to affect, us in various ways, including, among others:

      The economic impacts of the COVID-19 pandemic have negatively impacted, and are expected to continue to negatively impact, the financial stability of the mortgage loans and mortgage loan borrowers underlying the loans and securities that we own. In light of the current environment related to the COVID-19 pandemic on the overall economy, such as rising unemployment levels and changes in consumer behavior related to loans as well as government policies and pronouncements, the number of borrowers who become delinquent, default on, forbear or refinance their loans may increase significantly. We have entered into agreements with certain borrowers to allow, among other items, for a deferral of some portion of the amounts owed to us for an agreed-upon period of time. To the extent that borrowers underlying our loans and securities that have been negatively impacted by the COVID-19 pandemic do not timely make required payments on their loans, the value of such loans and securities will likely be impaired, potentially materially, and our income will be adversely affected.

      As a result of the decline in residential and commercial real estate values and other effects of the COVID-19 pandemic, we have experienced, and may continue to experience, declines in the value of our investments, which could be material.

      Due to the decline in the value of the loans or securities pledged by us under our loan financing lines, we have received and may in the future receive margin calls from our financing counterparties and, if we fail to resolve such margin calls when due by payment of cash or delivery of additional collateral, our financing counterparties may exercise remedies including demanding payment by us of our aggregate outstanding financing obligations and/or taking ownership of the loans or securities securing the applicable obligations. We may not have the funds available to repay such financing obligations, and we may be unable to raise the funds from alternative sources on favorable terms or at all. Forced sales of the loans or securities that secure our financing obligations in order to pay outstanding financing obligations may be on terms less favorable to us than might otherwise be available in a regularly functioning market and could result in deficiency judgments and other claims against us.

        In addition, if we fail to meet or satisfy any of the covenants in our loan financing lines or other financing arrangements as a result of the events described above or otherwise, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral or enforce their respective interests against existing collateral.

      Difficulty accessing capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may adversely affect our access to capital necessary to execute our strategy, fund our operations or address maturing liabilities on a timely basis, as well as the ability of the mortgage loan borrowers underlying the loans and securities that we own to meet their obligations to us. The negative impact of the COVID-19 pandemic has adversely affected, and may continue to adversely affect, our liquidity position and could limit our ability to execute our strategy and grow our business.

      A decline in the housing market and a resulting decline in demand for mortgage financing resulting from the economic effects of the COVID-19 pandemic could adversely affect our ability to make new investments.

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        Angel Oak Mortgage Lending scaled down its operations considerably and ceased new originations for a period commencing in March 2020, and in May 2020 re-entered the market. Angel Oak Mortgage Lending re-entered the originations market with a more limited offering of non-QM loans than prior to the COVID-19 pandemic and has tightened the underwriting criteria in effect under the programs that it is currently offering. As a result, the volume of non-QM loans available for us to purchase from Angel Oak Mortgage Lending has been more limited than prior to the COVID-19 pandemic, although the volume has increased considerably from May 2020 to February 2021. Prior to the onset of the COVID-19 pandemic in the United States, between January 1, 2020 and March 31, 2020, we acquired 958 loans for an aggregate purchase price of $389.1 million. We paused loan purchases in April 2020 through August 2020, resuming purchases in September 2020. From September 1, 2020 through March 5, 2021, we have purchased 316 loans for an aggregate purchase price of $167.2 million. Due to the uncertainty as to the duration of the COVID-19 pandemic and the timing of the reopening of the economy, we are not able to predict with any significant level of confidence the timeline for the return of the market for the origination of non-QM loans at levels experienced prior to the COVID-19 pandemic.

        In addition, because of the disruptions to the normal operation of mortgage finance markets, our investment activities may not be able to function efficiently because of, among other factors, an inability to access short-term or long-term financing, a disruption to the securitization market, or our inability to access these markets or execute securitization transactions due to adverse impacts to our financial condition or operating capabilities resulting from the COVID-19 pandemic.

        We also may face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of the COVID-19 pandemic.

      The inability of our third-party servicers and other service providers to operate in affected areas or at all, including as a result of bankruptcy or otherwise.

      Uncertainties created by the COVID-19 pandemic may make it difficult to estimate provisions for loan losses.

      The potential negative impact on the health of our executive officers or other personnel of our Manager, particularly if a significant number of them are impacted, and an inability to recruit, attract and retain skilled personnel to replace any such executive officers or other personnel to the extent necessary.

      A deterioration in our Manager's ability to ensure business continuity during the COVID-19 pandemic.

              The ultimate impact of the COVID-19 pandemic on us depends on many factors that are not within our control, including, but not limited, to: governmental, business and individuals' actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic, and actions taken in response thereto, on global and regional economies and economic activity; the availability of U.S. federal, state, local or non-U.S. funding programs; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. However, to the extent current conditions worsen, it could have a material adverse effect on the value of our assets, our financial condition, results of operations and liquidity, and, in turn, cash available for distribution to our stockholders. Even after the COVID-19 pandemic subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.

              To the extent any of these risks and uncertainties adversely affect us in the ways described above or otherwise, we expect that they will also have the effect of heightening many of the other risks

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    described in this "Risk Factors" section, including, without limitation, "— Risks Related to Our Investment Activities," "— Risks Related to Our Company," "— Risks Related to Our Financing and Hedging," "— Risks Related to Our Common Stock and this Offering" and "— General Risk Factors," which in turn could further materially adversely affect us, including in ways that are not currently known to us or that we do not currently consider to present significant risks.

    Risks Related to Our Relationship with Our Manager

    We are dependent on our Manager and certain key personnel of Angel Oak that are or will 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.

              We are externally managed by our Manager and all of our officers are employees of Angel Oak. We have no separate facilities and are substantially reliant on our Manager, which has significant discretion as to the implementation of our operating policies and execution of our business strategies and risk management practices. We also depend on our Manager's access to the professionals and principals of Angel Oak as well as information and loan flow generated by Angel Oak Mortgage Lending. The employees of Angel Oak identify, evaluate, negotiate, structure, close and monitor our portfolio. The departure of any of the members of the senior management team of our Manager, or of a significant number of investment professionals or principals of Angel Oak, could have a material adverse effect on us. We can offer no assurance that our Manager will remain our manager or that we will continue to have access to Angel Oak's, including Our Manager's, senior management. We are subject to the risk that our Manager will terminate the management agreement or that we may deem it necessary to terminate the management agreement or prevent certain individuals from performing services for us and that no suitable replacement will be found to manage us.

    Other than our dedicated Chief Financial Officer and Treasurer and a partially dedicated employee that our Manager will provide to us, the Angel Oak personnel provided to our Manager, as our external manager, are not required to dedicate a specific portion of their time to the management of our business.

              Other than our dedicated Chief Financial Officer and Treasurer and a partially dedicated employee that our Manager will provide to us, neither our Manager nor Angel Oak is obligated to dedicate any specific personnel exclusively to us nor is our Manager or its personnel obligated to dedicate any specific portion of their time to the management of our business. Although our Manager has informed us that Brandon Filson will serve as our dedicated Chief Financial Officer and Treasurer and that he will spend all of his time on our affairs, key personnel, including Mr. Filson, provided to us by our Manager may become unavailable to us as a result of their departure from Angel Oak or for any other reason. As a result, we cannot provide any assurances regarding the amount of time our Manager will dedicate to the management of our business, and Angel Oak, including our Manager, may have conflicts in allocating their time, resources and services among our business and any other entities they manage, and such conflicts may not be resolved in our favor. Consequently, we may not receive the level of support and assistance that we otherwise might receive if we were internally managed. Our Manager and its affiliates are not restricted from entering into other investment advisory relationships or from engaging in other business activities.

    We are dependent on our Manager, whose senior management team has limited experience operating a REIT and a public company.

              Our Manager was formed in February 2018. Although Angel Oak has been active in the mortgage credit market since 2008, our Manager's senior management team has limited experience operating a REIT and operating a business in compliance with the numerous technical restrictions and limitations set forth in the Code and the Investment Company Act. Moreover, our Manager's senior management team has limited experience operating a public company with listed equity securities, which is required

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    to comply with numerous laws, regulations and requirements, including the requirements of the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and requirements of the NYSE. This limited experience may hinder our Manager's ability to successfully operate our business. In addition, maintaining our REIT qualification and complying with the applicable Investment Company Act exclusions limit the types of investments we are able to make. We cannot assure you that our Manager's senior management team will be successful on our behalf or at all.

    There are conflicts of interest in our relationship with Angel Oak, including our Manager, and we may compete with existing and future managed entities of Angel Oak, which may present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders.

              We are subject to conflicts of interest arising out of our relationship with Angel Oak, including our Manager. Currently, all of our officers, including our dedicated Chief Financial Officer and Treasurer, and one of our directors also serve as employees of Angel Oak. As a result, our Manager, our officers and this director may have conflicts between their duties to us and their duties to, and interests in, Angel Oak, including our Manager. For example, Mr. Fierman, the Chairman of our Board of Directors, also serves as a Managing Partner and Co-Chief Executive Officer of Angel Oak Companies.

              Some examples of conflicts of interest that may arise by virtue of our relationship with Angel Oak, including our Manager, include:

      Loans Originated by Angel Oak Mortgage Lending.  Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending. Since our commencement of operations in September 2018 through December 31, 2020, a substantial portion of the target assets in our portfolio had been acquired from Angel Oak Mortgage Lending, and we expect that, in the future, a substantial portion of our portfolio will continue to consist of target assets acquired from Angel Oak Mortgage Lending. As our Manager directs our investment activities, there are conflicts of interest related to the fact that Angel Oak Mortgage Lending consists of affiliates of our Manager, including the following.

      Our Manager will have an incentive to favor the acquisition of non-QM loans or other target assets from Angel Oak Mortgage Lending over third-party sellers because purchasing non-QM loans or other target assets from Angel Oak Mortgage Lending would generate fees for Angel Oak Mortgage Lending (including fees payable by us and origination fees payable by the borrowers of the loans originated by Angel Oak Mortgage Lending), which would benefit Angel Oak. In addition, our acquisition of non-QM loans or other target assets from Angel Oak Mortgage Lending would allow Angel Oak Mortgage Lending to sell such non-QM loans or other target assets and obtain liquidity to make more loans, even where Angel Oak Mortgage Lending would be unable to sell the non-QM loans or other target assets on favorable terms to unaffiliated third parties in the market due to unfavorable market conditions or other reasons. Our Manager could acquire non-QM loans or other target assets on our behalf from Angel Oak Mortgage Lending even if such non-QM loans or other target assets were unsuitable for us, or we could identify better quality non-QM loans or other target assets, or obtain better pricing, from unaffiliated third parties. Although we utilize third-party pricing vendors to evaluate the fairness of the price for non-QM loans or other target assets we acquire from Angel Oak Mortgage Lending, there can be no assurance that we will purchase such non-QM loans or other target assets from Angel Oak Mortgage Lending at a fair price.

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        In addition, conflicts could arise if Angel Oak Mortgage Lending breaches the applicable agreement relating to our acquisition of loans or other assets from Angel Oak Mortgage Lending, or otherwise fails to perform its obligations under such agreement, resulting in harm or damages to us. Our Manager may not require customary representations and warranties from Angel Oak Mortgage Lending concerning the non-QM loans or other target assets we acquire from them and our Manager may not seek indemnity or demand repurchase or substitution of such non-QM loans or other target assets in the event Angel Oak Mortgage Lending breaches a representation or warranty given to us. In such circumstances with unaffiliated third parties, we would be free to seek such recourse as is appropriate, including litigation. In this case, however, because of the affiliation, our Manager could have a potential conflict in determining what action to take against an affiliate, which could have a material adverse effect on us. Furthermore, our Manager may not conduct as thorough of a review of the loans acquired from Angel Oak Mortgage Lending in comparison to the review our Manager would conduct for loans acquired from unaffiliated third parties. If our Manager conducts more limited due diligence on the loans acquired from Angel Oak Mortgage Lending, such due diligence may not reveal all of the risks associated with such loans, which could materially and adversely affect us.

        Moreover, although, our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending, this strategy may need to adapt to changing market conditions or other factors. If investment in non-QM loans falls out of favor or otherwise becomes unattractive because of perceived risks, unfavorable pricing or otherwise, our Manager will have a conflict of interest in determining whether our strategy should continue to focus on the acquisition of non-QM loans, particularly if the origination of such loans continues to be a focus of Angel Oak Mortgage Lending. The continued pursuit of our strategy under these circumstances may result in losses. The significant majority of the loans that Angel Oak Mortgage Lending currently originates are non-QM loans. Similarly, failure to adjust our strategy may cause us to forego other attractive investment opportunities outside investments in non-QM loans. Our Manager will have a conflict in determining whether to adjust our strategy and to pursue investments in other types of target assets that may be more attractive even if Angel Oak Mortgage Lending continues to originate non-QM loans.

        We have purchased RMBS, and expect to continue to purchase RMBS or CMBS, that are collateralized by loans originated by Angel Oak Mortgage Lending, and our portfolio may consist of a significant amount of such securities. Certain affiliates of our Manager may receive benefits, including compensation, for their activities related to the creation of the securitization and the issuance and sale of such securities. We will also bear a portion of the expense incurred in connection with the securitization vehicle to which we sell the loans we have acquired. Such expenses include, but are not limited to, the costs and expenses related to structuring the securitization vehicle and the transactions related to the sale of the loans by us to the securitization vehicle.

        Angel Oak has in place policies and procedures that we believe are reasonably designed to facilitate arm's length transactions between us and Angel Oak Mortgage Lending and any other affiliates with respect to non-QM loans and other target assets purchased from Angel Oak Mortgage Lending or other affiliates. Additionally, our affiliated transactions committee, which will be comprised of two of our independent directors, must approve, among other matters, our acquisition of any non-QM loans and any other target assets we acquire from Angel Oak Mortgage Lending or other affiliate of our Manager. However, there can be no assurance that such policies and procedures will be successful and we could purchase loans from Angel Oak Mortgage Lending at less favorable prices from what we could have obtained from unaffiliated third parties and we could ultimately suffer losses as a result.

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      Other Angel Oak Managed Entities.  Angel Oak currently advises, and in the future expects to continue to advise, other entities that may have investment objectives and strategies similar, in whole or in part, to ours and may use the same or similar strategies to those we employ. For example, Angel Oak has previously formed a private REIT as well as other funds that invest in residential mortgage loans, and may raise additional investment vehicles in the future, including entities formed to make investments that we could be precluded or materially limited from making because of laws or regulations applicable to us. Angel Oak is not restricted in any way from sponsoring or accepting capital from new entities, even for investing in asset classes or strategies that are similar to, or overlapping with, our asset classes or strategies. The existence of such multiple managed entities may create conflicts of interest, including, without limitation, with respect to the allocation of investment opportunities between us and other managed entities. See "— Allocation of Investment Opportunities" below. In addition, we may make an investment that may be pari passu, senior or junior in ranking to an investment made by another managed entity, and actions taken by such managed entity with respect to such investment may not be in our best interests, and vice versa. Furthermore, such activities may involve substantial time and resources of Angel Oak, including our Manager.

      Allocation of Investment Opportunities.  Although Angel Oak, including our Manager, may manage investments on behalf of a number of managed entities, including us, investment decisions and allocations will not necessarily be made in parallel among us and these other managed entities. Investments made by us may not, and are not intended in all cases to, replicate the investments, or the investment methods and strategies, of other entities managed by Angel Oak, including our Manager. Nevertheless, Angel Oak, including our Manager, from time to time may elect to apportion major or minor portions of the investments to be made by us among other entities that they manage, and vice versa.

        When allocating investment opportunities among us and one or more other managed entities, Angel Oak Capital allocates such opportunities pursuant to its written investment allocation policy. Angel Oak Capital's written investment allocation policy allocates investment opportunities based on each managed entity's guidelines, the strategy and available cash of Angel Oak managed entities, market supply and other factors. Target allocations for each managed entity are established by Angel Oak Capital's portfolio management team prior to the execution of any aggregated trade. In the event an aggregated trade is partially filled, Angel Oak's managed entities will generally receive a pro rata share of the executed trade based upon the target allocation set by Angel Oak Capital's portfolio management team.

        For loans acquired from Angel Oak Mortgage Lending, each week Angel Oak Capital receives a loan tape from Angel Oak Mortgage Lending. The loan tape is reviewed to ensure compliance with our and other Angel Oak managed entities' investment guidelines. If any exceptions are found, the loan is further reviewed to ensure there are accompanying compensating factors. Following review of the loan tape, a custodial review is performed to ensure necessary documentation exists or is provided. Concurrently with the custodial review, loans are priced based on the current rate sheet and an allocation among Angel Oak managed entities is determined. Angel Oak's portfolio management team establishes a monthly target allocation first by loan type and then by loan size. Loans from Angel Oak Mortgage Lending that fit the investment guidelines of Angel Oak's managed entities, including us, are allocated first to such managed entities. Each round of loan purchases is then allocated to each participating managed entity based on the target allocation (or as closely as possible given available loan sizes) in order to avoid one managed entity from being fully allocated ahead of any other managed entity. Loans are allocated on an alternating basis to each eligible managed entity. Angel Oak Capital's compliance team approves each loan allocation and our affiliated transactions committee, which will be comprised of two of our independent directors, must approve, among other matters, our

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        acquisition of any non-QM loans and any other target assets we acquire from Angel Oak Mortgage Lending or other affiliate of our Manager.

        Accordingly, not all investments which are consistent with our investment objective and strategies are or will be presented to us. There is no assurance that any such conflicts arising out of the foregoing will be resolved in our favor. Angel Oak Capital is entitled to amend its investment allocation policy at any time without prior notice to us or our consent.

      Service Providers.  Our Manager may engage affiliated service providers, including affiliates that act as the servicer for the loans in our portfolio. Such relationships may influence our Manager in deciding whether to select such service providers. Our Manager's affiliates receive benefits, including compensation, for these activities, although we believe that the use of such affiliates is in the best interests of our stockholders. Additionally, affiliated service providers will not have the same independence with respect to the performance of their duties to us as an unaffiliated service provider. For example, Angel Oak Mortgage Solutions acted as the servicing administrator in the securitization transactions for AOMT 2019-2, AOMT 2019-4 and AOMT 2019-6 and Angel Oak Home Loans acted as the servicing administrator for AOMT 2020-3, and such entities are responsible for servicing the securitized mortgage loans pursuant to separate pooling and servicing agreements. Under each pooling and servicing agreement, Angel Oak Mortgage Solutions or Angel Oak Home Loans, as applicable, is entitled to receive a servicing administration fee as compensation for its activities in its capacity as a servicing administrator. The use of affiliated service providers may impair our ability to obtain the most favorable terms with respect to such services and transactions, which could materially and adversely affect us.

      Management.  Other than our dedicated Chief Financial Officer and Treasurer that our Manager provides to us, the officers of our Manager and its affiliates devote as much time to us as our Manager deems appropriate; however, these officers may have conflicts in allocating their time and services among us and Angel Oak's other managed entities. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from our Manager and Angel Oak employees, other entities that Angel Oak manages will likewise require greater focus and attention, placing our Manager and Angel Oak's resources in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed or if Angel Oak did not act as a manager or advisor for other entities.

      Securitizations.  We have participated in several securitization transactions, and in the future intend to continue to participate in securitization transactions, in which other managed entities of Angel Oak also contribute mortgage loans or other assets. There can be no assurance that the valuation of the assets that we contribute to any such securitization will not be understated or the assets that such other managed entities contribute will not be overstated, resulting in less cash proceeds or securities issued by the securitization vehicle to us or more cash proceeds or securities issued by the securitization vehicle to such managed entities than would otherwise be the case. In addition, other Angel Oak managed entities may contribute assets to securitizations that we also contribute assets to, potentially exposing us to assets that do not fit within our strategy or that we would not have otherwise acquired directly.

        AOMT's securitizations are typically structured with a two- or three-year non-call period for the securities issued in the securitization. After such period has ended, AOMT has the option to call the securitization at any point. AOMT would consider exercising this option if the financing marketplace is more attractive, or if the underlying asset values have increased. AOMT may choose to exercise its option to call the securitization, for the benefit of another Angel Oak managed entity, without taking into consideration our interests, and we may be unable to reinvest the proceeds we receive from any such call option for some period of time and such

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        proceeds may be reinvested by us in assets yielding less than the yields on the securities that were called.

      Material Non-Public Information.  We, directly or through Angel Oak, may obtain material non-public information about the investments in which we have invested or may invest. If we do possess material non-public information about such investments, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action with respect to such investments. Our Manager's and Angel Oak's management of other managed entities could create a conflict of interest to the extent our Manager or Angel Oak is aware of material non-public information concerning potential investment decisions. In addition, this conflict may limit the freedom of our Manager to make potentially profitable investments, which could have an adverse effect on our operations. These limitations imposed by access to material non-public information could therefore materially and adversely affect us.

              We also face additional conflicts of interest in our relationship with Angel Oak, including our Manager, as described below and under "Business — Conflicts of Interest; Equitable Allocation of Opportunities."

    We rely on Angel Oak Mortgage Lending to source non-QM loans and other target assets for acquisition by us and they are under no contractual obligation to sell to us any loans that it originates.

              Our operating results are dependent upon our Manager's ability to source non-QM loans and other target assets for acquisition by us from Angel Oak Mortgage Lending. Although we are a party to loan purchase agreements and mortgage purchase agreements with Angel Oak Mortgage Lending, and such agreements provide the framework pursuant to which we have agreed to purchase from Angel Oak Mortgage Lending certain target assets, Angel Oak Mortgage Lending has no obligation to sell non-QM loans or other target assets to us and we may be unable to locate other originators that are able or willing to originate non-QM loans and other target assets that meet our standards. If Angel Oak Mortgage Lending is unable to originate non-QM loans due to business, competitive, regulatory or other reasons, or for any other reason is unable or unwilling to provide non-QM loans and other target assets for sale to us in sufficient quantity, we may not be able to source acquisitions of non-QM loans and other target assets from other originators, banks and other sellers, on favorable terms and conditions or at all. In this regard, mortgage originators are subject to significant regulation and oversight and failure by Angel Oak Mortgage Lending to comply with its obligations under law may result in an inability to originate non-QM loans or other target assets in certain jurisdictions or at all. Similarly, if Angel Oak Mortgage Lending otherwise separates from its affiliation with our Manager, it may determine to sell the non-QM loans or other target assets that it originates to other parties. Angel Oak Mortgage Lending could also enter into commitments with third parties to sell them non-QM loans or other assets, and reduce the quantity of loans that would otherwise be available for purchase by us. If we cannot source an adequate volume of attractive non-QM loans and other target assets from Angel Oak Mortgage Lending on desirable terms, we may not be able to acquire a sufficient amount of attractive non-QM loans or other target assets to make our strategy profitable, and we may be materially and adversely affected.

              Our agreements with Angel Oak Mortgage Lending were negotiated between related parties, and their terms, including the purchase price for such target assets sold under such agreements, may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

              In addition, conflicts could arise if Angel Oak Mortgage Lending breaches the applicable agreement relating to our acquisition of target assets from Angel Oak Mortgage Lending, or otherwise fails to perform its obligations under such agreement, resulting in harm or damages to us. Further Angel Oak Mortgage Lending provides representations and warranties regarding the target assets we purchase from them. If Angel Oak Mortgage Lending breaches a representation or warranty relating to one of the

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    target assets we purchase from them, our Manager may not seek the same recourse against Angel Oak Mortgage Lending as it would with unaffiliated third parties. Our Manager could have a potential conflict in determining what action to take against an affiliate, which could have a material adverse effect on us.

    Our 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.

              We pay our Manager base management fees regardless of the performance of our portfolio. Our Manager's entitlement to base management fees, which are based on our "Equity" (as defined under "Our Manager and the Management Agreement — The Management Agreement — Base Management Fees, Incentive Fees and Reimbursement of Expenses — Base Management Fee"), might reduce its incentive to devote its time and effort to seeking loans or other investments that provide attractive risk-adjusted returns for our stockholders and instead may incentivize our Manager to advance strategies that increase our equity. There may be circumstances where increasing our equity will not optimize the returns for our stockholders, and consequently, we will be required to pay our Manager base management fees in a particular period despite experiencing a net loss or a decline in the value of our portfolio during that period.

              In addition, our Manager has the ability to earn incentive fees each quarter based on our Core Earnings as calculated in accordance with the management agreement, which may create an incentive for our Manager to invest in assets with higher yield potential, which are generally riskier or more speculative, or sell an asset prematurely for a gain, in an effort to increase our Core Earnings and thereby increase the incentive fee to which it is entitled. This could result in increased risk to our portfolio. If our interests and those of our Manager are not aligned, the execution of our strategies could be adversely affected, which could materially and adversely affect us.

    The management agreement with our Manager was not negotiated on an arm's-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate. Our Manager's liability is limited under the management agreement, and we have agreed to indemnify our Manager against certain liabilities.

              The management agreement that we and our operating partnership will enter into with our Manager upon the completion of this offering and our formation transactions will be negotiated between related parties, and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party. Various potential and actual conflicts of interest may arise from the activities of Angel Oak by virtue of the fact that our Manager is controlled by Angel Oak. See "— Our 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."

              A termination without cause of the management agreement, which is defined in the management agreement and includes unsatisfactory performance by our Manager that is materially detrimental to us, is subject to several conditions which may make such a termination difficult and costly. Termination of the management agreement with our Manager may require us to pay our Manager a substantial termination fee, which will increase the effective cost to us of terminating the management agreement, thereby adversely affecting our ability to terminate our Manager without cause.

              Our Manager will not assume any responsibility other than to provide the services specified in the management agreement in good faith and will not be responsible for any action of our Board of Directors in following or declining to follow its advice or recommendations. None of our Manager or its affiliates or their respective managers, officers, directors, trustees, employees or members or any person providing sub-advisory services to our Manager will be liable to us, any of our subsidiaries, our Board of

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    Directors, our stockholders or any subsidiary's interest holders for any acts or omissions performed under the management agreement, except because of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager's duties under the management agreement. We have agreed to indemnify our Manager and its affiliates and their respective managers, officers, directors, trustees, employees and members and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including reasonable attorneys' fees) in respect of or arising from such person's acts or omissions performed in good faith under the management agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager's duties under the management agreement. As a result, we could experience poor performance or losses for which our Manager would not be liable.

    Our 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.

              Our ability to achieve our objectives depends on our Manager's ability to identify and acquire assets that meet our target asset criteria. We are dependent on our Manager's relationship with Angel Oak Mortgage Lending and our Manager's ability to source investment opportunities consistent with our strategy, which is currently focused on the acquisition of non-QM loans from Angel Oak Mortgage Lending. Additionally, accomplishing our objectives is largely a function of our Manager's identification of target assets, access to financing on acceptable terms and general market conditions. Our stockholders will not have input into our investment decisions. All of these factors increase the uncertainty, and thus the risk, of investing in our common stock. The senior management team of our Manager has substantial responsibilities under the management agreement. In order to implement certain strategies, our Manager may need to hire, train, supervise and manage new employees successfully. Any failure to manage our future growth effectively could have a material adverse effect on us.

    If our Manager ceases to be our Manager, our lenders and our derivative counterparties may cease doing business with us.

              If our Manager ceases to be our Manager, it could constitute an event of default or early termination event under our future financing and hedging agreements, upon which our counterparties would have the right to terminate their agreements with us. If our Manager ceases to be our Manager for any reason, including upon the non-renewal of the management agreement, and we are unable to obtain or renew financing or enter into or maintain derivative transactions, we may be materially and adversely affected.

    We 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.

              We do not own the brand, trademark or logo that we will use in our business and may be unable to protect this intellectual property against infringement from third parties. In connection with this offering, we have entered into a trademark license agreement (the "trademark license agreement") with an affiliate of our Manager (the "licensor") pursuant to which it has granted us a non-exclusive, non-transferable, non-sublicensable, royalty-free license to use the name "Angel Oak Mortgage, Inc." Under this agreement, we have a right to use this name for so long as our Manager (or another Angel Oak affiliate that serves as our manager) remains an affiliate of the licensor under the trademark license agreement. The trademark license agreement is subject to automatic termination if our Manager or another affiliate of Angel Oak is no longer acting as our manager under the management agreement. The trademark license agreement may be terminated by the licensor without cause and in its sole judgment after thirty days' written notice to us or immediately if the licensor believes that we are using the licensed marks improperly. The licensor will retain the right to continue using the "Angel Oak" name. The trademark license agreement does not permit us to preclude the licensor from licensing or transferring the ownership of the "Angel Oak" name to third parties, some of whom may compete against us. Consequently, we may be unable to prevent any damage to goodwill that may occur as a result of the activities of the licensor, Angel Oak or others. Furthermore, in the event that the trademark license agreement is terminated, we will be required to, among other things, change our name and NYSE ticker symbol. Any of these events could disrupt our recognition in the market place, damage any goodwill we may have generated and otherwise have a material adverse effect on us.

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    We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us.

              We have not adopted a policy that expressly prohibits our directors, officers, security holders or affiliates from having a direct or indirect pecuniary interest in any asset to be acquired or disposed of by us or any of our subsidiaries or in any transaction to which we or any of our subsidiaries is a party or has an interest, nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. In addition, nothing in the management agreement binds or restricts our Manager or any of its affiliates, officers or employees from buying, selling or trading any securities or commodities for their own accounts or for the accounts of others for whom our Manager or any of its affiliates, officers or employees may be acting.

    Under the management agreement, our Manager has a contractually defined duty to us rather than a fiduciary duty.

              Under the management agreement, our Manager maintains a contractual as opposed to a fiduciary relationship with us which limits our Manager's obligations to us to those specifically set forth in the management agreement. The right of our Manager or its personnel and its officers to engage in other business activities may reduce the time our Manager spends managing us. In addition, unlike for directors, there is no statutory standard of conduct under the MGCL for officers of a Maryland corporation.

    Our 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.

              Our Manager is authorized to follow very broad investment guidelines and our Manager may change its investment process without stockholder consent at any time. In addition, in conducting periodic reviews, our Board of Directors will rely primarily on information provided to them by our Manager. Furthermore, our Manager may arrange for us to use complex strategies or to enter into complex transactions that may be difficult or impossible to unwind by the time they are reviewed by our Board of Directors. Our Manager has great latitude within our broad investment guidelines to determine the types of assets it may decide are proper for purchase by us, which could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect us.

              In addition, there can be no assurance that our Manager will follow its investment process in relation to the identification and underwriting of prospective investments. Changes in our Manager's investment process may result in inferior due diligence and underwriting standards, which may materially and adversely affect us.

    Risks Related to Our Investment Activities

    Our 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.

              Our 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, and our Manager may be unable to do so for many reasons. Angel Oak Mortgage Lending has no obligation to sell non-QM loans and other target assets to us and our Manager may be unable to locate other originators that are able or willing to originate non-QM loans and other target assets that meet our standards on favorable terms or at all. General economic factors, such as recession, declining home values, unemployment and high interest rates, may limit the supply of available non-QM loans and other target assets. Moreover, competition for non-QM loans and other target assets may drive down supply or drive up

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    prices, making it uneconomical to purchase such loans or other target assets. For instance, in acquiring non-QM loans and other target assets from unaffiliated parties, we will compete with a broad spectrum of institutional investors, many of which have greater financial resources than us. Increased competition for, or a reduction in the available supply of, qualifying investments could result in higher prices for (and thus lower yields on) such investments, which could narrow the yield spread over borrowing costs. Competition may also reduce the number of investment opportunities available to us and may adversely affect the terms upon which investments can be made. We may incur due diligence or other costs on investments which may not be successful or may not be completed at all. As a result, we may incur additional costs to acquire a sufficient volume of non-QM loans and other target assets or be unable to acquire such loans and other target assets at reasonable prices or at all. There can be no assurance that attractive investments will be available for us or that available investments will meet our strategies. If we cannot source an adequate volume of desirable non-QM loans and other target assets on attractive terms or at all, we may be materially and adversely affected.

    We have not previously included secondary market purchases of our target assets as part of our investment strategy and there can be no assurance that we will be successful in acquiring our target assets through the secondary market on attractive terms or at all.

              As part of our investment strategy, we may acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases. However, we have not previously included secondary market purchases of our target assets as part of our investment strategy. Accordingly, we and our Manager have limited experience in sourcing and acquiring our target assets through the secondary market and not from Angel Oak Mortgage Lending. Additionally, the credit and return profiles of our target assets that our Manager sources through the secondary market may not be in line with our expectations. As a result, there can be no assurance that we will be successful in acquiring our target assets through the secondary market on attractive terms or at all and we may be materially and adversely affected.

    We may allocate the net proceeds of this offering to investments with which you may not agree.

              We will have significant flexibility in investing the net proceeds of this offering. You will be unable to evaluate the manner in which the net proceeds of these offerings will be invested or the economic merit of our expected investments and, as a result, we may use the net proceeds to invest in investments with which you may not agree. The failure of our Manager to apply these proceeds effectively or find investments that meet our investment criteria in sufficient time or on acceptable terms could result in unfavorable returns, which could materially and adversely affect us. Because assets we expect to acquire may experience periods of illiquidity, we may lose profits or be prevented from earning capital gains if we cannot sell mortgage-related assets at an opportune time.

    Difficult conditions in the residential mortgage and residential real estate markets as well as general market concerns may adversely affect the value of residential mortgage loans, including non-QM loans, and other target assets in which we invest.

              Our business is materially affected by conditions in the residential mortgage market, the residential real estate market, the financial markets, and the economy, including inflation, energy costs, unemployment, geopolitical issues, concerns over the creditworthiness of governments worldwide and the stability of the global banking system. In particular, the residential mortgage market in the United States has experienced, in the past, a variety of difficulties and challenging economic conditions, including defaults, credit losses, and liquidity concerns. Certain commercial banks, investment banks, insurance companies, and mortgage-related investment vehicles (including publicly traded mortgage REITs) incurred extensive losses from exposure to the residential mortgage market as a result of these difficulties and conditions. These factors have impacted in the past and may continue to impact investor perception of the risks associated with the residential real estate market, residential mortgage loans and

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    various other target assets in which we may invest. As a result, values for residential mortgage loans, including non-QM loans, and various other target assets in which we may invest have experienced, and may in the future experience, significant volatility. Any deterioration of the residential mortgage market and investor perception of the risks associated with residential mortgage loans, including non-QM loans, and various other of our target assets could have a material adverse effect on us.

    The non-QM loans in which we invest are subject to less stringent underwriting guidelines than QM loans and could experience substantially higher rates of delinquencies, defaults and foreclosures than those experienced by QM loans.

              Non-QM loans are subject to less stringent underwriting guidelines than those used in underwriting QM loans. Some of the major requirements of a QM loan are: the DTI must not exceed 43%; points and fees cannot exceed 3% of the loan amount; and a standardized list of documents is required for underwriting and income documentation. Any loan that fails to meet these strict criteria and falls outside the parameters is deemed "non-QM." Accordingly, the underwriting guidelines for non-QM loans are more permissive as to the borrower's DTI, credit history and/or income documentation. Non-QM loans underwritten pursuant to less stringent underwriting guidelines could experience substantially higher rates of delinquencies, defaults and foreclosures than those experienced by QM loans. Thus, because of the higher delinquency rates and losses that may be associated with non-QM loans, the performance of our investments in non-QM loans could be correspondingly adversely affected, which could materially and adversely affect us.

    The non-QM loans in which we invest are subject to increased risks.

              The non-QM loans in which we invest are subject to increased risk of loss compared to investments in certain of our other target assets, such as Agency RMBS. A non-QM loan is directly exposed to losses resulting from default. Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower, and the priority and enforceability of the lien will significantly impact the value of such non-QM loan. In the event of a foreclosure, we may assume direct ownership of the underlying real estate. The liquidation proceeds upon the sale of such real estate may not be sufficient to recover our cost basis in the non-QM loan, and any costs or delays involved in the foreclosure or liquidation process may increase losses. The value of non-QM loans is also subject to property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies and to a reduction in a borrower's mortgage debt by a bankruptcy court. In addition, claims may be assessed against us because of our position as a mortgage holder or property owner, including assignee liability, environmental hazards and other liabilities. In some cases, these claims may lead to losses exceeding the purchase price of the related non-QM loan or property. Unlike Agency RMBS, non-QM loans are not guaranteed by the U.S. Government or any GSE. Additionally, by directly acquiring non-QM loans, we do not receive the structural credit enhancements that benefit senior tranches of RMBS. The occurrence of any of these risks could have a material adverse effect on us.

    Angel Oak Mortgage Lending is subject to extensive licensing requirements and regulation, which could materially and adversely affect us.

              As of December 31, 2020, Angel Oak Mortgage Lending was licensed to originate loans in 43 states and in the District of Columbia, and is currently subject to significant regulation by both U.S. federal and state regulators, including the CFPB and various state offices of financial regulation. Over the years, regulators have vigilantly enforced the regulation of loan originators and have penalized or, in some cases, even suspended non-compliant originators' ability to originate loans in their jurisdictions for their failure to comply with regulatory requirements. This risk may be heightened in originating non-QM loans as a result of greater risks of default due to their departure in certain respects from QM loan standards. Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to non-QM loan borrowers and primarily sourced from

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    Angel Oak Mortgage Lending and we expect that, in the future, a substantial portion of our portfolio will consist of non-QM loans and other assets acquired from Angel Oak Mortgage Lending.

              If Angel Oak Mortgage Lending is unable to originate loans in one or more jurisdictions as a result of regulatory issues or otherwise, it may result in fewer investment opportunities for us or in opportunities that are less geographically diversified. Further, any such regulatory issues for Angel Oak Mortgage Lending could result in damage to the reputation of Angel Oak in the market and impact Angel Oak Mortgage Lending's ability to continue to source a significant volume of non-QM loan originations. If Angel Oak Mortgage Lending is unable to originate the volume of loans anticipated, we may also be unable to identify other sources of non-QM loans for acquisition to satisfy our strategy and we may need to alter such strategy to seek other investments.

    Our portfolio is concentrated, and may continue to be concentrated, by asset type and by region, increasing our risk of loss if there are adverse developments or greater risks affecting the particular concentration.

              Our investment guidelines do not require us to observe specific diversification criteria. Currently, we are focused on acquiring and investing in first lien non-QM loans in the U.S. mortgage market. As of December 31, 2020, substantially all of the loans underlying our portfolio of RMBS consisted of non-QM loans. In addition, as of December 31, 2020, approximately 27%, 23%, 11% and 7% of the unpaid principal balance of the loans underlying our portfolio of RMBS from the AOMT securitizations we participated in was secured by properties located in California, Florida, Texas and Georgia, respectively. As a result, our portfolio is concentrated, and may continue to be concentrated, by asset type and geographic region, increasing our risk of loss if there are adverse developments or greater risks affecting the particular concentration. Accordingly, downturns relating generally to non-QM loans may result in defaults on a number of our non-QM loans within a short time period, and adverse conditions in the areas where the properties securing or otherwise underlying our investments are concentrated (including unemployment rates, changing demographics and other 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.

    Currently, we are focused on acquiring and investing in non-QM loans, which may subject us to legal, regulatory and other risks, which could materially and adversely affect us.

              Currently, we are focused on acquiring and investing in non-QM loans that will not have the benefit of enhanced legal protections otherwise available in connection with the origination of residential mortgage loans to a more restrictive credit standard, as further described below. The ownership of non-QM loans will subject us to legal, regulatory and other risks, including those arising under U.S. federal consumer protection laws and regulations designed to regulate residential mortgage loan underwriting and originators' lending processes, standards and disclosures to borrowers. These laws and regulations include the CFPB's "Know Before You Owe" mortgage disclosure rule, the ATR rules under the Truth-in-Lending Act and QM loan regulations, in addition to various U.S. federal, state and local laws and regulations intended to discourage predatory lending practices by residential mortgage loan originators. The ATR rules specify the characteristics of a QM loan and two levels of presumption of compliance with the ATR rules: a safe harbor and a rebuttable presumption for higher priced loans. The "safe harbor" under the ATR rules applies to a covered transaction that meets the definition of a QM loan and is not a "higher-priced covered transaction." For any covered transaction that meets the definition of a QM loan and is not a "higher-priced covered transaction," the creditor or assignee will be deemed to have complied with the ability-to-repay requirement and, accordingly, will be conclusively presumed to have made a good faith and reasonable determination of the consumer's ability to repay. Creditors or assignees will have the benefit of a rebuttable presumption of compliance with the applicable ATR rules if they have complied with the QM loan characteristics of the ATR rules other than the residential mortgage loan being higher-priced in excess of certain thresholds. Non-QM loans, such as

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    residential mortgage loans with a DTI exceeding 43%, do not have the benefit of either a safe harbor from liability under the ATR rules or a rebuttable presumption of compliance with the ATR rules. Application of certain standards set forth in the ATR rules is highly subjective and subject to interpretive uncertainties. As a result, a court may determine that a residential mortgage loan did not meet the standard or test even if the originator reasonably believed such standard or test had been satisfied. Failure of residential mortgage loan originators or servicers to comply with these laws and regulations could subject us, as a purchaser or an assignee of these loans (or as an investor in securities backed by these loans), to monetary penalties assessed by the CFPB through its administrative enforcement authority and by mortgagors through a private right of action against lenders or as a defense to foreclosure, including by recoupment or setoff of finance charges and fees collected, and could result in rescission of the affected residential mortgage loans, which could materially and adversely affect us. Such risks may be higher in connection with the acquisition of non-QM loans, which is currently the focus of our strategy. Borrowers under non-QM loans may be more likely to challenge the analysis conducted under the ATR rules by lenders. Even if a borrower does not succeed in the challenge, additional costs may be incurred in connection with challenging and defending such claims, which may be more costly in judicial foreclosure jurisdictions than in non-judicial foreclosure jurisdictions, and there may be more of a likelihood such claims are made since the borrower is already exposed to the judicial system to process the foreclosure.

    The non-QM loans and other residential mortgage loans in which we invest are subject to a risk of default, among other risks.

              Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to non-QM loan borrowers and primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending. We also may invest in other target assets. Further, we may identify and acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases. Such acquisitions and investments will subject us to risks which include, among others:

      declines in the value of residential or commercial real estate;

      risks related to the phasing out of LIBOR or other benchmarks as reference rates for loans and securities;

      risks related to general and local economic conditions, including unemployment rates;

      lack of available mortgage funding for borrowers to refinance or sell their homes or other properties;

      overbuilding;

      increases in property taxes;

      changes in U.S. federal and state lending laws;

      changes in zoning laws;

      costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems, such as indoor mold;

      casualty or condemnation losses;

      acts of God, terrorism, social unrest and civil disturbances;

      uninsured damages from floods, earthquakes or other natural disasters;

      limitations on and variations in rents;

      fluctuations in interest rates;

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      undetected or unknown fraudulent activity by borrowers, originators and/or sellers of mortgage loans;

      undetected deficiencies and/or inaccuracies in underlying mortgage loan documentation and calculations; and

      failure of the borrower to adequately maintain the property, particularly during times of financial difficulty.

              To the extent that assets underlying our investments are concentrated geographically, by property type or in certain other respects, we may be subject to certain of the foregoing risks to a greater extent. Additionally, we may be required to foreclose on a mortgage loan and such actions would subject us to greater concentration of the risks of the real estate markets and risks related to the ownership and management of real property.

    We may need to foreclose on certain of the residential mortgage loans we acquire, which could result in losses that materially and adversely affect us.

              We may find it necessary or desirable to foreclose on certain of the residential mortgage loans, including non-QM loans, we acquire, and the foreclosure process may be lengthy and expensive. There are a variety of factors that may inhibit the ability to foreclose upon a residential mortgage loan and liquidate real property. These factors include, without limitation: (1) extended foreclosure timelines in states that require judicial foreclosure, including states where we may hold high concentrations of residential mortgage loans; (2) significant collateral documentation deficiencies; (3) U.S. federal, state or local laws that are borrower friendly, including legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures and that serve to delay the foreclosure process; (4) programs that require specific procedures to be followed to explore the refinancing of a residential mortgage loan prior to the commencement of a foreclosure proceeding; and (5) declines in real estate values and sustained high levels of unemployment that increase the number of foreclosures and place additional pressure on the already overburdened judicial and administrative systems. In periods following home price declines, "strategic defaults" (decisions by borrowers to default on their mortgage loans despite having the ability to pay) also may become more prevalent. Even if we are successful in foreclosing on a residential mortgage loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. We will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the residential mortgage loan. Furthermore, any costs or delays involved in the foreclosure of the loan or a liquidation of the underlying property will further reduce the net proceeds and, thus, increase the loss. The incurrence of any such losses could materially and adversely affect us.

              In addition, certain issues, including "robo-signing," have been identified throughout the mortgage industry that relate to affidavits used in connection with the mortgage loan foreclosure process. To the extent any of our investments are impacted by these issues, the foreclosure proceedings relating to such loans may have to be re-commenced, thereby resulting in additional delays that could diminish the expected return on our investments. The uncertainty surrounding these issues could also result in legal, regulatory or industry changes to the foreclosure process as a whole, any or all of which could lengthen the foreclosure process and materially and adversely affect us.

              Additionally, in the event of the bankruptcy of a residential mortgage loan borrower, the residential mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the residential mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. If borrowers default on their residential mortgage loans and we are unable to recover any resulting loss through the foreclosure process, we could be materially and adversely affected.

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    Increases 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.

              Our operating results will depend in large part on the difference between the income from our assets, net of credit losses, and financing costs. We anticipate that, in many cases, the income from our assets will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, to the extent not offset by our interest rate hedges, may significantly influence our financial results.

              Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Interest rate fluctuations present a variety of risks, including the risk that our borrowing costs will approach, or even exceed, the yields on our assets, and the risk of adverse fluctuations in prepayment rates.

              Fixed income assets typically decline in value if interest rates increase. If long-term interest rates were to increase significantly, not only would the market value of these assets be expected to decline, but these assets could lengthen in duration because borrowers would be less likely to prepay their mortgages. Further, an increase in short-term interest rates would increase the rate of interest payable on any short-term borrowings used to finance these assets. Subject to qualifying and maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, but there can be no assurances that our hedges will be successful, or that we will be able to enter into or maintain such hedges. As a result, interest rate fluctuations can cause significant losses, reductions in income, and could materially and adversely affect us.

              In addition, rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of target assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives. If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, it could materially and adversely affect us.

    A flattening of the yield curve or a yield curve inversion may adversely affect us.

              In a normal yield curve environment, many of the types of assets in which we invest will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders. A significant risk associated with these assets is the risk that both long-term and short-term interest rates could increase significantly. If long-term rates increased significantly, the market value of these assets could decline, and the duration and weighted-average life of the assets could increase. We could realize a loss if the assets were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on our existing or future loan financing lines or repurchase facilities we use to finance the purchase of these assets. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs would generally increase more rapidly than the interest income earned on our assets. In 2017, the yield curve experienced a significant flattening due to various factors, including the U.S. Federal Reserve's increase in short-term interest rates and a continued strong demand for longer duration, fixed-income assets.

              Because our existing and future investments generally bear or will bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net interest spread, net interest margin, net income, and the market value of our net assets, or book value. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve

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    inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net income.

    The expected discontinuance of LIBOR and transition to alternative reference rates may adversely affect us.

              On July 27, 2017, the Chief Executive of the United Kingdom's Financial Conduct Authority ("FCA"), which regulates the LIBOR administrator, ICE Benchmark Administration Limited ("IBA"), announced that the FCA will no longer persuade or compel panel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that market participants cannot rely on LIBOR being published after 2021. On December 4, 2020, the IBA published a consultation on its intention to cease the publication of LIBOR. For the most commonly used tenors (overnight and one, three, six and 12 months) of U.S. dollar LIBOR, the IBA is proposing to cease publication immediately after June 30, 2023, anticipating continued rate submissions from panel banks for these tenors of U.S. dollar LIBOR. The IBA's consultation also proposes to cease publication of all other U.S. dollar LIBOR tenors, and of all non-U.S. dollar LIBOR rates, after December 31, 2021. The FCA and U.S. bank regulators have welcomed the IBA's proposal to continue publishing certain tenors for U.S. dollar LIBOR through June 30, 2023 because it would allow many legacy U.S. dollar LIBOR contracts that lack effective fallback provisions and are difficult to amend to mature before such LIBOR rates experience disruptions. U.S. bank regulators are, however, encouraging banks to cease entering into new financial contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. Given consumer protection, litigation, and reputation risks, U.S. bank regulators believe entering into new financial contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks. In addition, they expect new financial contracts to either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR's discontinuation. Although the foregoing may provide some sense of timing, there is no assurance that LIBOR, of any particular currency and tenor, will continue to be published or be representative of the underlying market until any particular date, and it appears highly likely that LIBOR will be discontinued or modified after December 31, 2021 or June 30, 2023, depending on the currency and tenor.

              A significant amount of the mortgage loans and other mortgage-related assets in our portfolio or that we may acquire in the future bear or will bear interest at a rate that adjusts in accordance with LIBOR, and we expect that a significant portion of such loans and assets will not have matured, been prepaid or otherwise terminated prior to the time at which LIBOR ceases to be published. It is not possible to predict all consequences of the IBA's proposals to cease publishing LIBOR, any related regulatory actions and the expected discontinuance of the use of LIBOR as a reference rate for financial contracts. Some mortgage loans and mortgage-related assets held by us now or in the future may not include robust fallback language that would facilitate replacing LIBOR with a clearly defined alternative reference rate after LIBOR's discontinuation. If such mortgage loans and mortgage-related assets mature after LIBOR ceases to be published, our counterparties may disagree with us about how to calculate or replace LIBOR. Even when robust fallback language is included, there can be no assurance that the replacement rate plus any spread adjustment will be economically equivalent to LIBOR, which could result in a lower interest rate being paid to us on such assets. Modifications to any mortgage loans, mortgage-related assets, interest rate hedging transactions or other contracts to replace LIBOR with an alternative reference rate could result in adverse tax consequences. Any of these events could negatively affect the value of our mortgage loans and mortgage-related assets, negatively impact our ability to sell such mortgage loans and mortgage-related assets, and negatively impact our ability to effectively hedge our interest rate risks, any of which could adversely affect us.

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              The Alternative Reference Rates Committee, a group of private-market participants convened by the U.S. Federal Reserve Board and the New York Federal Reserve, has recommended the Secured Overnight Financing Rate ("SOFR") as a more robust reference rate alternative to U.S. dollar LIBOR. The use of SOFR as a substitute for LIBOR is voluntary and may not be suitable for all market participants. SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. To approximate economic equivalence to LIBOR, SOFR can be compounded over a relevant term and a spread adjustment may be added. Market practices related to SOFR calculation conventions continue to develop and may vary. Inconsistent calculation conventions among financial products may expose us to increased basis risk and resulting costs.

    Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.

              Some of our investments, including the bonds that may be issued in our future securitization transactions for which we would be required to retain a portion of the credit risk, may be rated by rating agencies. Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings would not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value and liquidity of our investments could significantly decline, which would adversely affect the value of our portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.

    Prepayment rates may adversely affect the value of our portfolio.

              Prepayment rates may adversely affect the value of our portfolio. Prepayment rates on our investments, where contractually permitted, are influenced by changes in current interest rates, significant improvement in the performance of underlying real estate assets and a variety of economic, geographic and other factors beyond our control. Consequently, prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from increases in such rates. The constant prepayment rate ("CPR") on AOMT 2019-2's, AOMT 2019-4's, AOMT 2019-6's and AOMT 2020-3's portfolio of loans for the three months ended December 31, 2020, on an annualized basis, was 31.6%, 27.4%, 32.3% and 28.8%, respectively. 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. An increase in prepayment rates, as measured by the CPR, will typically accelerate the amortization of AOMT 2019-2's, AOMT 2019-4's, AOMT 2019-6's and AOMT 2020-3's portfolio of loans, thereby reducing the yield or interest income earned on such assets. Because all of AOMT 2019-2's, AOMT 2019-4's, AOMT 2019-6's and AOMT 2020-3's portfolios of loans were originated subsequent to December 31, 2017, the CPR on AOMT 2019-2's, AOMT 2019-4's, AOMT 2019-6's and AOMT 2020-3's portfolios of loans for the three months ended December 31, 2020, on an annualized basis, may not be indicative of and may understate the CPR on AOMT 2019-2's, AOMT 2019-4's, AOMT 2019-6's and AOMT 2020-3's portfolios of loans in the future.

              In periods of declining interest rates, prepayments on investments generally increase and the proceeds of prepayments received during these periods may generally be reinvested by us in comparable assets at reduced yields. In addition, the market value of investments subject to prepayment may, because of the risk of prepayment, benefit less than other fixed-income securities from declining interest rates. Conversely, in periods of rising interest rates, prepayments on investments, where contractually

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    permitted, generally decrease, in which case we would not have the prepayment proceeds available to invest in comparable assets at higher yields. Under certain interest rate and prepayment scenarios, we may fail to recoup fully our cost of certain investments.

    Our investments in Agency RMBS and non-Agency RMBS may result in losses stemming from prepayments on the underlying asset and changes in interest rates.

              We intend to invest (or continue to invest) in Agency RMBS and non-Agency RMBS. As of December 31, 2020, our portfolio included approximately $149.9 million of non-Agency RMBS. RMBS are subject to particular risks because they have yield and maturity characteristics corresponding to their underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity when the entire principal amount comes due, payments on certain RMBS include both interest and a partial payment of principal. This partial payment of principal may be comprised of a scheduled principal payment, as well as an unscheduled payment from the voluntary prepayment, refinancing, or foreclosure of the underlying assets. As a result of these unscheduled payments of principal, or prepayments on the underlying assets, the price and yield of RMBS can be adversely affected. For example, during periods of declining interest rates, prepayments can be expected to accelerate, and we would be required to reinvest proceeds at the lower interest rates then available. Prepayments of mortgages that underlie securities purchased at a premium could result in capital losses because the premium may not have been fully amortized at the time the obligation is prepaid. In addition, like other interest-bearing securities, the values of RMBS generally fall when interest rates rise, but when interest rates fall, their potential for capital appreciation is limited due to the existence of the prepayment feature.

              The performance of any RMBS, and the results of hedging arrangements entered into with respect thereto, will be affected by: (1) the rate and timing of principal payments on the underlying assets; and (2) the extent to which such principal payments are applied to reduce, or otherwise result in the reduction of, the principal or notional amount of such RMBS. The rate of principal payments on a pool of RMBS will in turn be affected by the amortization schedules of the assets (which, in the case of assets with an adjustable-rate feature, may change periodically to accommodate adjustments to the mortgage rates thereon) and the rate of principal prepayments thereon (including for this purpose, voluntary prepayments by borrowers and prepayments resulting from liquidations of RMBS due to defaults, casualties or condemnations affecting the related properties).

              The extent of prepayments of principal of the assets underlying RMBS may be affected by a number of factors, including the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the servicing of the underlying assets, possible changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors. In general, any factors that increase the attractiveness of selling a mortgaged property or refinancing such property, enhance a borrower's ability to sell or refinance or increase the likelihood of default under a MBS would be expected to cause the rate of prepayment in respect of a pool of MBS to accelerate. In contrast, any factors having an opposite effect would be expected to cause the rate of prepayment of a pool of MBS to slow.

              The rate of prepayment on a pool of MBS is likely to be affected by prevailing market interest rates for mortgages of a comparable type, term and risk level. When the prevailing market interest rate is below a mortgage coupon, a borrower generally has an increased incentive to refinance. Even in the case of assets with an adjustable-rate component, as prevailing market interest rates decline, and without regard to whether the mortgage rates on such assets decline in a manner consistent therewith, the related borrowers may have an increased incentive to refinance for purposes of either: (1) converting to a fixed rate security and thereby "locking in" such rate; or (2) taking advantage of a different index, margin or rate cap or floor on another adjustable-rate note. Therefore, as prevailing market interest rates decline, prepayment speeds would be expected to accelerate.

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              Increases in monthly payments on adjustable-rate mortgages due to higher interest rates may result in greater future delinquency rates. Borrowers with adjustable payments may be exposed to increased monthly payments when the related mortgage interest rate adjusts upward from the initial fixed rate or a low introductory rate, as applicable, to the rate computed in accordance with the applicable index and margin. This increase in borrowers' monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers subject to adjustable-rates.

              Borrowers seeking to avoid these increased monthly payments by refinancing may no longer be able to find alternatives at comparably low interest rates. A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance. Furthermore, borrowers who intend to sell their homes on or before the expiration of the fixed rate periods may find that they cannot sell their properties for an amount equal to or greater than their unpaid principal balances. These events, alone or in combination, may contribute to higher delinquency rates and therefore potentially higher losses on RMBS.

    Our investment in lower rated non-Agency RMBS resulting from the securitization of our assets or otherwise, exposes us to the first loss on the mortgage assets held by the securitization vehicle. Additionally, the principal and interest payments on non-Agency RMBS are not guaranteed by any entity, including any government entity or GSE, and therefore are subject to increased risks, including credit risk.

              Our portfolio includes, and is expected to continue to include, non-Agency RMBS which are backed by non-QM and other residential mortgage loans that are not issued or guaranteed by an Agency or a GSE. Within a securitization of residential mortgage loans, various securities are created, each of which has varying degrees of credit risk. We anticipate that our investments in non-Agency RMBS will be concentrated in lower-rated and unrated securities in which we are exposed to the first loss on the residential mortgage loans held by the securitization vehicle, which will subject to us to the most concentrated credit risk associated with the underlying residential mortgage loans.

              Additionally, the principal and interest on non-Agency RMBS, unlike those on Agency RMBS, are not guaranteed by GSEs such as Fannie Mae and Freddie Mac or, in the case of Ginnie Mae, the U.S. Government. Non-Agency RMBS are subject to many of the risks of the respective underlying mortgage loans. A residential mortgage loan is typically secured by a single-family residential property and is subject to risks of delinquency and foreclosure and risk of loss. The ability of a borrower to repay a loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors, including, but not limited to, a general economic downturn, unemployment, acts of God, terrorism, social unrest and civil disturbances, may impair the borrower's ability to repay its mortgage loan. In periods following home price declines, "strategic defaults" (decisions by borrowers to default on their mortgage loans despite having the ability to pay) also may become more prevalent. In the event of defaults under residential mortgage loans backing any of our non-Agency RMBS, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the residential mortgage loan.

              Additionally, in the event of the bankruptcy of a residential mortgage loan borrower, the residential mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the residential mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a residential mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed residential mortgage loan. If borrowers default on the residential mortgage loans backing our non-Agency RMBS and we are unable to recover any resulting loss through the foreclosure process, we could be materially and adversely affected.

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    We may invest in investment property loans, which will expose us to an increased risk of loss.

              We may invest in investment property loans, which are mortgage loans made on portfolios of residential rental properties. The repayment of such a loan by the property owner (i.e., the borrower) often depends primarily on its tenant's continuing ability to pay rent to the property owner. If the property owner is unable to find or retain a tenant for the rental property, the property owner would cease to have a continuous rental income stream with respect to the property and, as a result, the property owner's ability to repay the loan on a timely basis or at all could be adversely affected. In addition, the physical condition of non-owner-occupied properties can be below that of owner-occupied properties due to lax property maintenance standards, which can have a negative impact on the value of the collateral properties. Moreover, loans on non-owner-occupied residential properties generally involve larger principal amounts and a greater degree of risk than owner-occupied residential mortgage loans, resulting in a higher likelihood that we will be subject to losses on such investment property loans.

    We may invest in jumbo prime mortgage loans, which will expose us to additional credit risk.

              We may invest in jumbo prime mortgage loans, which generally do not conform to GSE underwriting guidelines primarily because the mortgage balance exceeds the maximum amount permitted by GSE underwriting guidelines. Jumbo prime mortgage loans are subject to the risks described above relating to investments in residential mortgage loans, but may expose us to increased risks because of their larger balances and because they cannot be immediately sold to GSEs. Additionally, in the event of a default by a borrower on a jumbo prime mortgage loan, we could experience greater losses than a typical loan in our portfolio due to the large mortgage balance associated with jumbo prime mortgage loans.

    The performance of our investments in commercial real estate loans, including senior mortgage loans and small balance commercial real estate loans, is dependent upon factors that are outside our control.

              We have invested in small balance commercial real estate loans, and we may continue to invest in these and other commercial real estate loans, including senior mortgage loans, which are secured (directly or indirectly) by commercial property and are subject to risks of delinquency and foreclosure. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property, which is outside our control. If the operating income of the property decreases due to a variety of factors affecting the property's commercial operations, the borrower's ability to repay the loan may be impaired. Special risks associated with commercial real estate loan investments include changes in the general economic climate or local conditions (such as an oversupply of space or a reduction in demand for space), competition based on rental rates, attractiveness and location of the properties, changes in the financial condition of tenants and changes in operating costs. Real estate values are also affected by such factors as governmental regulations (including those governing usage, improvements, zoning and taxes), interest rate levels, the availability of financing and potential liability under changing environmental and other laws. Of particular concern may be those mortgaged properties which are, or have been, the site of manufacturing, industrial or disposal activities. Such environmental risks may give rise to a diminution in the value of property (including real property securing our investment) or liability for cleanup costs or other remedial actions, which liability could exceed the value of such property or the principal balance of the related investment. In certain circumstances, a lender may choose not to foreclose on contaminated property rather than risk incurring liability for remedial actions. In the event of any default under a commercial real estate loan held by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the real estate loan, which could materially and adversely affect us.

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    We may acquire second lien mortgage loans, which pose additional risks for us.

              We may acquire second lien mortgage loans. A second lien mortgage loan is a residential mortgage loan that is subordinate to the primary or first lien mortgage loan on a residential property. In the event of a default or a bankruptcy of the borrower, the second lien mortgage loan will not be paid off until the first lien mortgage loan is paid off, resulting in a higher likelihood that we will be subject to losses on such second lien mortgage loan. As a result, we may not recover all or even a significant part of our investment, which could result in losses and have a material adverse effect on us.

    We may invest in commercial bridge loans, mezzanine loans, construction loans and B-Notes, which would subject us to an increased risk of loss.

              We 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.

      Commercial Bridge Loans.  Commercial bridge loans are, generally, floating rate whole loans secured by first priority mortgage liens on the commercial real estate made to borrowers seeking short-term capital to be used in the acquisition, construction or redevelopment of commercial properties. Commercial bridge loans provide interim financing to borrowers seeking short-term capital for the acquisition or transition (for example, lease up and/or rehabilitation) of commercial real estate and generally have a maturity of five years or less. Such a borrower under a transitional loan has usually identified an asset that has been under-managed or is located in a recovering market. If the market in which the asset is located fails to recover according to the borrower's projections, or if the borrower fails to improve the quality of the asset's management or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the transitional loan, and we will bear the risk that we may not recover some or all of our investment. In addition, borrowers usually use the proceeds of a conventional mortgage loan to repay a transitional loan. We may therefore be dependent on a borrower's ability to obtain permanent financing to repay a transitional loan, which could depend on market conditions and other factors. In the event of any failure to repay under a transitional loan held by us, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the commercial bridge loan, which could materially and adversely affect us.

      Mezzanine Loans.  We may acquire mezzanine loans made to commercial property owners that are secured by pledges of the borrowers' ownership interests, in whole or in part, in entities that directly or indirectly own the properties, such loans being subordinate to whole loans secured by first or second mortgage liens on the properties themselves. In each instance where an investment is a mezzanine loan secured by interests in a property-owning entity, our investment in such loan will be subject, directly or indirectly, to the mortgage or other security interest of a senior lender. The rights and remedies afforded a senior lender may limit or preclude the exercise of rights and remedies by us, with resultant loss to us. Further, the equity owners of properties or entities in which we invest may raise defenses (including protection under bankruptcy laws) to enforcement of rights or imposition of remedies by us. In the event such defenses were successful, or resulted in delay, we could incur losses, which could materially and adversely affect us.

      Construction Loans.  If we fail to fund our entire commitment on a construction loan or if a borrower otherwise fails to complete the construction of a project, there could be adverse consequences associated with the loan, including, without limitation: (1) a loss of the value of the property securing the loan, especially if the borrower is unable to raise funds to complete it from other sources; (2) a borrower claim against us for failure to perform under the loan documents; (3) increased costs to the borrower that the borrower is unable to pay; (4) a bankruptcy filing by

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        the borrower; and (5) abandonment by the borrower of the collateral for the loan. Additionally, the process of foreclosing on a property is time-consuming, and we may incur significant expense if we foreclose on a property securing a loan under these or other circumstances. The occurrence of any of the foregoing events could result in losses to us, which could materially and adversely affect us.

      B-Notes.  We may acquire B-Notes that are subordinated in right of payment to an A-Note, which is a senior interest in such loan. The B-Notes in which we may invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses. If a borrower defaults, there may not be sufficient funds remaining for B-Note holders after payment to the A-Note holders. Since each transaction is privately negotiated, B-Notes can vary in their structural characteristics and risks. For example, the rights of holders of B-Notes to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each B-Note investment. B-Notes are not as liquid as some forms of debt instruments and, as a result, we may be unable to dispose of performing, underperforming or non-performing B-Note investments. The higher risks associated with our subordinate position in such investment could subject us to increased risk of losses, which could materially and adversely affect us.

    Our investments in residential bridge ("fix and flip") loans will 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.

              We may invest in residential bridge ("fix and flip") loans, which are particularly illiquid investments due to their short life and the greater difficulty of recoupment in the event of a borrower's default. As these loans provide borrowers with short-term capital typically in connection with the acquisition and re-development of a single family or multi-family residence, with a view to the borrower selling the property, there is a risk that a borrower may not be able to sell the property on attractive terms or at all once the property has been re-developed. Moreover, the borrower may experience difficulty in completing the re-development of the property on schedule or at all, whether as a result of cost over-runs, construction-related delays or other issues, which may result in delays selling the property or an inability to sell the property at all. Since the borrower would typically use the proceeds of the sale of the property to repay the bridge loan, if any of the foregoing events were to occur, the borrower may be unable to repay its loan on a timely basis or at all, which may materially and adversely affect us.

    We 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.

              We may invest in Alt-A mortgage loans and subprime residential mortgage loans or RMBS backed by collateral pools of Alt-A mortgage loans and subprime residential mortgage loans. Due to economic conditions, including increased interest rates and lower home prices, as well as aggressive lending practices, Alt-A mortgage loans and subprime residential mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. These loans are also more likely to be negatively impacted by governmental interventions, such as mandated modification programs or foreclosure moratoria, bankruptcy cramdown, regulatory enforcement actions and other requirements. Thus, because of the higher delinquency rates and losses associated with Alt-A mortgage loans and subprime residential mortgage loans, the performance of Alt-A mortgage loans and subprime residential mortgage loans or RMBS backed by Alt-A mortgage loans and subprime residential mortgage loans in which we may invest could be correspondingly adversely affected, which could materially and adversely affect us.

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    We may invest in CRT securities that are subject to mortgage credit risk.

              We may invest in CRT securities, which are risk-sharing instruments issued by GSEs, or similarly structured transactions arranged by third-party market participants, that transfer a portion of the risk associated with credit losses within pools of conventional residential mortgage loans to investors such as us. The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from the GSEs to private investors, and transactions arranged by third-party market participants in the CRT sector are similarly structured to reference a specific pool of loans that have been securitized by the GSEs and to synthetically transfer mortgage credit risk related to those loans to the purchaser of the securities. The holder of CRT securities therefore bears the risk that the borrowers may default on their obligations to make full and timely payments of principal and interest. To the extent that we are a holder of CRT securities, we will be exposed to such risks and may suffer losses.

    Investments that we may make in CMBS pose additional risks.

              Our portfolio may include CMBS, which are mortgage-backed securities secured by interests in a single commercial real estate loan or a pool of mortgage loans secured by commercial properties. CMBS are issued in public and private transactions by a variety of public and private issuers using a variety of structures, including senior and subordinated classes. CMBS generally lack standardized terms and tend to have shorter maturities than RMBS. Additionally, certain CMBS lack regular amortization of principal, resulting in a single "balloon" payment due at maturity. If the underlying mortgage borrower experiences business problems, or other factors limit refinancing alternatives, such balloon payment mortgages are likely to experience payment delays or even default. All of these factors increase the risk involved with investments in CMBS.

              Most CMBS are effectively non-recourse obligations of the borrower, meaning that there is no recourse against the borrower's assets other than the collateral. If borrowers are not able or willing to refinance or dispose of encumbered property to pay the principal and interest owed on such mortgages, payments on the subordinated classes of the related CMBS are likely to be adversely affected. The ultimate extent of the loss, if any, to the subordinated classes of CMBS may only be determined after a negotiated discounted settlement, restructuring or sale of the mortgage note, or the foreclosure (or deed-in-lieu of foreclosure) of the mortgage encumbering the property and subsequent liquidation of the property.

    We may acquire MSRs or excess MSRs, which would expose us to significant risks.

              We may acquire MSRs or excess MSRs. MSRs would arise from contractual agreements between us and investors (or their agents) in mortgage loans and mortgage securities. The determination of the value of MSRs will require us to make numerous estimates and assumptions. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced mortgage loans. The ultimate realization of the fair value of MSRs may be materially different than the values of such MSRs estimated by us. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on us.

              Changes in interest rates are a key driver of the performance of MSRs. Historically, the fair value of MSRs has increased when interest rates rise and decreased when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. To the extent we do not hedge against changes in the value of MSRs, our investments in MSRs would be more susceptible to volatility due to changes in the value of, or cash flows from, the MSRs as interest rates change.

              Prepayment speeds significantly affect MSRs. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. We may base the price we pay for MSRs

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    and the rate of amortization of those assets on, among other things, projections of the cash flows from the related pool of mortgage loans. Our Manager's expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speed expectations increase significantly, the value of the MSRs could decline. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from MSRs, and we could ultimately receive substantially less return on such assets. Moreover, delinquency rates have a significant impact on the valuation of any MSRs. An increase in delinquencies generally results in lower revenue because typically we would only collect servicing fees for performing loans. Our Manager's expectation of delinquencies is also a significant assumption underlying projections of potential returns. If delinquencies are significantly greater than expected, the estimated value of the MSRs could be diminished. When the estimated value of MSRs is reduced, we could suffer a loss.

              Furthermore, MSRs and the related servicing activities are subject to numerous U.S. federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on the holders of such investments. Our failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which they are subject by virtue of ownership of MSRs, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on us.

              Because excess MSRs are a component of the related MSR, the risks of owning an excess MSR are similar to the risks of owning an MSR. The valuation of excess MSRs is based on many of the same estimates and assumptions used to value MSR assets, thereby creating the same potential for material differences between estimated value and the actual value that is ultimately realized. Also, the performance of excess MSRs is impacted by the same drivers as the performance of MSR assets, including interest rates, prepayment speeds and delinquency rates.

    We may invest in ABS and consumer loans, which poses additional risks.

              To 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.

              ABS are subject to the credit exposure of the underlying assets. Unscheduled prepayments of ABS may result in a loss of income. Movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain types of ABS. Borrower loan loss rates may be significantly affected by delinquencies, defaults, economic downturns or general economic conditions beyond the control of individual borrowers. Increases in borrower loan loss rates reduce the income generated by, and the value of, ABS. The value of ABS may be affected by other factors, such as the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets or the entities providing credit enhancements and the ability of the servicer to service the underlying collateral. In addition, issuers of ABS may have limited ability to enforce the security interest in the underlying assets, collateral securing the payment of loans may not be sufficient to ensure repayment, and credit enhancements (if any) may be inadequate in the event of default.

              The ability of borrowers to repay consumer loans may be adversely affected by numerous borrower-specific factors, including unemployment, divorce, major medical expenses or personal bankruptcy. General factors, including an economic downturn, high energy costs or acts of God or terrorism, may also affect the financial stability of borrowers and impair their ability or willingness to repay their loans. Whenever a consumer loan held by us defaults, we will be at risk of loss to the extent of any deficiency between the liquidation value of the collateral, if any, securing the loan, and the principal and accrued interest of the loan. In addition, investments in consumer loans may entail greater risk than investments in residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured

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    by assets that depreciate rapidly. Pursuing any remaining deficiency following a default is often difficult or impractical, especially when the borrower has a low credit score, making further substantial collection efforts unwarranted. In addition, repossessing personal property securing a consumer loan can present additional challenges, including locating and taking physical possession of the collateral. We may rely on servicers who service these consumer loans to, among other things, collect principal and interest payments on the loans and perform loss mitigation services, and these servicers may not perform in a manner that promotes our interests.

    We may invest in distressed or non-performing residential mortgage loans and commercial real estate loans, which could increase our risk of loss.

              We may invest in distressed residential mortgage loans and commercial real estate loans where the borrower had failed to make timely payments of principal and/or interest or where the loan was performing but subsequently could or did become non-performing. There are no limits on the percentage of non-performing loans we may hold. Further, the borrowers on non-performing residential mortgage loans may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due. Borrowers of non-performing commercial real estate loans may be in economic distress due to changes in the general economic climate or local conditions (such as an oversupply of space or a reduction in demand for space), competition based on rental rates, attractiveness and location of the properties, changes in the financial condition of tenants and changes in operating costs. Distressed assets may entail characteristics that make disposition or liquidation more challenging, including, among other things, severe document deficiencies or underlying real estate located in states with extended foreclosure timelines. Additionally, many of these loans may have LTVs in excess of 100%, meaning the amount owed on the loan exceeds the value of the underlying real estate. Any loss we may incur on such investments may be significant and could materially and adversely affect us.

    We may not be successful in acquiring loans through Angel Oak's Conduit Program, which is in the process of being established, and the Conduit Program could divert our Manager's attention from pursuing our target assets from Angel Oak Mortgage Lending and other third-party originators.

              Our strategy may also consist of acquiring residential mortgage loans through Angel Oak's conduit program (the "Conduit Program"), a program being established by Angel Oak to provide a sustainable model for sourcing attractive mortgage loan investments. Once the Conduit Program is established, we may utilize the program, pursuant to which we would acquire loans that meet specific purchase criteria from approved mortgage originators, who must meet stringent standards related to management experience, financial strength, risk management controls and mortgage loan quality. See "Business — Our Strategy" for more information. The Conduit Program has no operating history and there can be no assurance that such program will be operated successfully, or at all. Additionally, the success of the Conduit Program depends upon sourcing a large volume of desirable loans, which Angel Oak Capital may be unable to do for many reasons, including those described in "— Our 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" above. In particular, Angel Oak Capital may be unable to locate originators that are able or willing to originate mortgage loans that meet our standards on favorable terms and conditions to us.

              Angel Oak, including our Manager, is incentivized to grow the Conduit Program, which may divert our Manager's attention from pursuing our target assets from Angel Oak Mortgage Lending and other third-party originators. There can be no assurance that the loans we acquire through the Conduit Program, if established, would be better quality loans or that we would receive better pricing for loans acquired through the Conduit Program in comparison to the loans we acquire from Angel Oak Mortgage Lending or other third-party originators. Accordingly, if our Manager prioritizes our acquisition of

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    mortgage loans through the Conduit Program, if established, we could be materially and adversely affected.

    We rely on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio. Such models and other data may be incorrect, misleading or incomplete, which could cause us to purchase assets that do not meet our expectations or to make asset management decisions that are not in line with our strategy.

              Our Manager relies on the analytical models (both proprietary and third-party models) of Angel Oak Capital and information and data supplied by third parties. Models and data are used to value assets or potential assets, assess asset acquisition and disposition opportunities, manage our portfolio, assess the timing and amount of cash flows expected to be collected, and may also be used in connection with any hedging of our investments. Many of the models are based on historical trends. These trends may not be indicative of future results. Furthermore, the assumptions underlying the models may prove to be inaccurate, causing the models to also be incorrect. In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models and data, especially valuation or cash flow models, we may be induced to buy certain assets at prices that are too high, 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.

              Some of the risks of relying on analytical models and third-party data include the following:

      collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors;

      information about assets or the underlying collateral may be incorrect, incomplete, or misleading;

      asset, collateral, RMBS or CMBS historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation; and

      asset, collateral, RMBS or CMBS information may be outdated, in which case the models may contain incorrect assumptions as to what has occurred since the date information was last updated.

              Some models, such as prepayment models or default models, may be predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to potential losses. In addition, the predictive models used by our Manager may differ substantially from those models used by other market participants, with the result that valuations based on these predictive models may be substantially higher or lower for certain assets than actual market prices. Furthermore, because predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data, and, in the case of predicting performance in scenarios with little or no historical precedent (such as extreme broad-based declines in home prices, or deep economic recessions or depressions), such models must employ greater degrees of extrapolation and are therefore more speculative and of more limited reliability.

              All valuation models rely on correct market data inputs. If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect. However, even if market data is input correctly, "model prices" will often differ substantially from market prices. If our market data inputs are incorrect or our model prices differ substantially from market prices, we could be materially and adversely affected.

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    Valuations 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.

              The values of some of the assets in our portfolio or in which we intend to invest are not readily determinable. We value our assets quarterly at fair value, as determined in good faith by our Manager. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our Manager's determinations of fair value may differ from the values that would have been used if a ready market for these assets existed or from the prices at which trades occur. While in many cases our Manager's determination of the fair value of our assets is based on valuations provided by third-party dealers and pricing services, our Manager can and does value assets based upon its judgment and such valuations may differ from those provided by third-party dealers and pricing services. Furthermore, we may not obtain third-party valuations for all of our assets. Changes in the fair value of our assets directly impact our net income through recording unrealized appreciation or depreciation of our investments and derivative instruments, and so our Manager's determination of fair value has a material impact on our net income.

              Valuations of certain assets are often difficult to obtain or are unreliable. In general, dealers and pricing services heavily disclaim their valuations. Additionally, dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another.

              We could be materially and adversely affected if our Manager's fair value determinations of our assets were materially different from the values that would exist if a ready market existed for our assets.

    Our investments may be subject to significant impairment charges, which could materially and adversely affect us.

              We will monitor our investments for impairment indicators. The value of an investment is impaired when our analysis indicates that, with respect to an asset, it is probable that the value of the security is other-than-temporarily impaired. The judgment regarding the existence of impairment indicators is based on a variety of factors depending upon the nature of the investment and the manner in which the income related to such investment was calculated for purposes of our financial statements. If we determine that an impairment has occurred, we are required to make an adjustment to the net carrying value of the investment, which could materially and adversely affect us.

    The lack of liquidity in our assets may have a material adverse effect on us.

              The investments made or to be made by us in our target assets may be or may become illiquid. Market conditions could significantly and negatively impact the liquidity of these investments. Illiquid assets typically experience greater price volatility, as a ready market may not exist, and can be more difficult to value. It may be difficult or impossible to obtain third-party pricing on the assets that we acquire. If third-party pricing is obtained, validating such pricing may be more subjective than it would be for more liquid assets due to the uncertainties inherent in valuing assets for which reliable market quotations are not available. Any illiquidity of our assets may make it difficult for us to sell such assets on favorable terms or at all. If we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the intrinsic value of the assets and/or the value at which we previously recorded such assets.

              Assets that are illiquid are more difficult to finance. When we use leverage to finance assets and such assets subsequently become illiquid, we may lose or be subject to reductions on the financing supporting our leverage. Assets tend to become less liquid during times of financial stress, which is

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    often when liquidity is most needed. As a result, our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidity constraints, which could have a material adverse effect on us.

              Additionally, we have engaged, and intend to continue to engage, in securitizations to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets that will be subject to the U.S. Risk Retention Rules. Securitizations for which we act as "sponsor" (as defined in the U.S. Risk Retention Rules), or for which we act as co-sponsor and are selected to be the party obligated to comply with the U.S. Risk Retention Rules, require us (or a "majority-owned affiliate" within the meaning of the U.S. Risk Retention Rules) to retain a 5% interest in the related securitization issuing entity (the "Risk Retention Securities"). The Risk Retention Securities are required to be (1) a first loss residual interest in the issuing entity representing 5% of the fair value of the securities and other interests issued as part of the securitization transaction (a "horizontal slice"), (2) 5% of each class of the securities and other interests issued as part of the securitization transaction (a "vertical slice") or (3) a combination of a horizontal slice and a vertical slice that, in the aggregate, represents 5% of the transaction. Regardless of the form of risk retention selected, we or a majority-owned affiliate will be required to hold the Risk Retention Securities until the end of the time period required under the U.S. Risk Retention Rules (i.e., the respective risk retention holding period). We are or will be, as the case may be, generally prohibited from hedging the credit risk of the Risk Retention Securities or from financing the Risk Retention Securities except on a "full recourse" basis in accordance with the U.S. Risk Retention Rules. Accordingly, some of our securitizations will require us to hold Risk Retention Securities for an extended period and contribute to the lack of liquidity in our assets, which may have a material adverse effect on us. In addition, in certain cases, we have also covenanted to retain an interest, and to take certain other action, with respect to such securitizations for purposes of the EU Securitization Rules, and we may covenant to retain an interest, and to take certain other action, with respect to certain future securitizations for purposes of the EU Securitization Rules and the UK Securitization Rules; and, in each case, this has subjected us, or will subject us, to certain risks, including risks similar to those that arise under the U.S. Risk Retention Rules.

    We may be exposed to environmental liabilities with respect to properties in which we have an interest.

              In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, the presence of hazardous substances may adversely affect an owner's ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of an underlying property becomes liable for removal costs, the ability of the owner to make debt payments may be reduced, which in turn may materially adversely affect the value of the relevant mortgage-related assets held by us.

    Insurance 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.

              There are certain types of losses, generally of a catastrophic nature, such as acts of God, earthquakes, floods, hurricanes, terrorism or acts of war, which may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including acts of God, terrorism or acts of war, also might result in insurance proceeds that are insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received with respect to a property relating to one of our investments might not be adequate to restore our economic position with respect to our investment. Any uninsured loss could result in the corresponding non-performance of or loss on our investment related to such property.

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    Risks Related to Our Company

    We 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.

              We commenced operations in September 2018 and are organized as a Maryland corporation. In October 2018, we began investing in non-QM loans and other target assets. As a result, we have a limited operating history. We cannot assure you that we will be able to operate our business successfully or implement our operating policies and strategies. There can be no assurance that we will be able to generate sufficient returns to pay our operating expenses and make satisfactory distributions to our stockholders or any distributions at all. Our results of operations depend on several factors, including the availability of opportunities to acquire non-QM loans and other target assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and general economic conditions. Additionally, our results of operations depend on executing our strategy of making credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending, but there can be no assurance that we will be able to acquire such loans from Angel Oak Mortgage Lending on favorable terms or at all.

    We may change our strategy, investment guidelines, hedging strategy, and asset allocation, operational and management policies without notice or stockholder consent, which could materially and adversely affect us.

              Our Board of Directors has the authority to change our strategy, investment guidelines, hedging strategy, and asset allocation, operational and management policies at any time without notice to or consent from our stockholders, which could result in our purchasing assets or entering into hedging transactions that are different from, and possibly riskier than, the investments described in this prospectus. A change in our investment or hedging strategy may increase our exposure to real estate values, interest rates, and other factors. A change in our asset allocation could result in us purchasing assets in classes different from those described in this prospectus, which could materially and adversely affect us.

    Our 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.

              Before making an investment, our Manager conducts (either directly or using third parties) certain due diligence. There can be no assurance that our Manager will conduct any specific level of due diligence, or that, among other things, our Manager's due diligence processes will uncover all relevant facts or that any investment will be successful, which could result in losses on these investments, which, in turn, could materially and adversely affect us.

              In connection with the investments we make in residential mortgage loans, our Manager often utilizes, and will continue to utilize, third-party due diligence firms to perform independent due diligence on such loans. These firms review every loan and provide grades taking into account factors such as compliance, property appraisal, adherence to guidelines and documentation governing the loan. Our Manager also utilizes third-party pricing vendors to help ensure that the loans we acquire are purchased at a fair price. There can be no assurance that the third parties that our Manager engages will uncover all relevant risks associated with such investments, which could result in losses on these investments, which, in turn, could materially and adversely affect us.

              Additionally, our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending. Angel Oak Mortgage Lending consists of affiliates of our Manager and, accordingly, our Manager may not conduct as thorough of a review of the loans acquired from Angel Oak Mortgage Lending in comparison to the review our Manager would conduct for loans acquired from unaffiliated third parties. If our Manager conducts

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    more limited due diligence on the loans acquired from Angel Oak Mortgage Lending, such due diligence may not reveal all of the risks associated with such loans, which could materially and adversely affect us.

    The failure of our third-party servicers to service our investments effectively would materially and adversely affect us.

              We rely on external third-party servicers to service our investments, including the collection of all interest and principal payments on the loans in our portfolio and to perform loss mitigation services. If our third-party servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default. The failure of our third-party servicers to effectively service our mortgage loan investments could negatively impact the value of such investments and our performance, which would materially and adversely affect us.

              In addition, legislation that has been enacted or that may be enacted in order to reduce or prevent foreclosures through, among other things, loan modifications may reduce the value of our mortgage loans or loans underlying our investments. Mortgage servicers may be incentivized by the U.S. Government to pursue such loan modifications, as well as forbearance plans and other actions intended to prevent foreclosure, even if such loan modifications and other actions are not in the best interests of the owners of the mortgage loans. In addition to legislation that creates financial incentives for mortgage loan servicers to modify loans and take other actions that are intended to prevent foreclosures, legislation has also been adopted that creates a safe harbor from liability to creditors for servicers that undertake loan modifications and other actions that are intended to prevent foreclosures. Finally, laws may delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans or otherwise limit the ability of mortgage servicers to take actions that may be essential to preserve the value of the loan. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increase servicing costs. As a result of these legislative actions, the mortgage servicers on which we rely may not perform in our best interests or up to our expectations. If our third-party servicers, including mortgage servicers, do not perform as expected, it would materially and adversely affect us.

    We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process.

              There continues to be uncertainty regarding the timing and ability of servicers to remove delinquent borrowers from their homes, so that they can liquidate the underlying properties and ultimately pass the liquidation proceeds through to owners of the residential mortgage loans or other assets. Since the housing crisis, and in response to the well-publicized failures of many servicers to follow proper foreclosure procedures (such as involving "robo-signing"), mortgage servicers are being held to much higher foreclosure-related documentation standards than they previously were. However, because many mortgages have been transferred and assigned multiple times (and by means of varying assignment procedures), mortgage servicers have historically had difficulty, and may continue to have difficulty, furnishing the requisite documentation to initiate or complete foreclosures. This leads to stalled or suspended foreclosure proceedings, and ultimately additional foreclosure-related costs. Foreclosure-related delays also tend to increase ultimate loan loss severities as a result of property deterioration, amplified legal and other costs, and other factors. Many factors delaying foreclosure, such as borrower lawsuits and judicial backlog and scrutiny, are outside a servicer's control and have delayed, and will likely continue to delay, foreclosure processing in both judicial states (where foreclosures require court involvement) and non-judicial states. The concerns about deficiencies in foreclosure practices of servicers and related delays in the foreclosure process may impact our loss assumptions and affect the values of, and our returns on, our investments in residential mortgage loans, including non-QM loans, and in other target assets. Additionally, a servicer's failure to remove delinquent borrowers from their

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    homes in a timely manner could increase our costs, adversely affect the value of the property and residential mortgage loans and have a material adverse effect on us.

    Mortgage 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.

              The U.S. Government, through the U.S. Treasury, the Federal Housing Administration and the Federal Deposit Insurance Corporation, has in the past, and may in the future, implement programs designed to provide homeowners with assistance in avoiding mortgage loan foreclosures. The programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans. Recently, in response to the COVID-19 pandemic, the U.S. Government and various U.S. state governments have implemented measures to provide homeowners with assistance in avoiding mortgage loan foreclosures. See "— Risks Related to the COVID-19 Pandemic — The COVID-19 pandemic, measures intended to prevent its spread and government actions to mitigate its economic impact have caused, and are expected to continue to cause, severe and unprecedented disruptions in the U.S. and global economies and financial markets, and had an adverse effect on us in the past and could have a material adverse effect on us in the future."

              Loan modification and refinance programs may adversely affect the performance of our residential mortgage loans and other target assets. A significant number of loan modifications relating to our investments in residential mortgage loans and other target assets, including those related to principal forgiveness and coupon reduction, could negatively impact the realized yields and cash flows on such investments. In addition, it is also likely that loan modifications would result in increased prepayments on our investments. See "— Risks Related to Our Investment Activities — Prepayment rates may adversely affect the value of our portfolio" for information relating to the impact of prepayments on our investments.

              The U.S. Congress and various state and local legislatures may pass mortgage-related legislation that would affect our business, including legislation that would permit limited assignee liability for certain violations in the mortgage loan origination process, and legislation that would allow judicial modification of loan principal in the event of personal bankruptcy. We cannot predict whether or in what form Congress or the various state and local legislatures may enact legislation affecting our business or whether any such legislation will require us to change our practices or make changes in our portfolio in the future. These changes, if required, could materially and adversely affect us, particularly if we make such changes in response to new or amended laws, regulations or ordinances in any state where we hold a significant portion of our investments, or if such changes result in us being held responsible for any violations in the mortgage loan origination process.

              Existing loan modification programs, together with future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding residential mortgage loans and/or changes in the requirements necessary to qualify for refinancing of mortgage loans with Fannie Mae, Freddie Mac, or Ginnie Mae, may adversely affect the value of, and the returns on, our target assets, which could materially and adversely affect us.

    We operate in a highly competitive market.

              Our profitability depends, in large part, on our ability to acquire our target assets at favorable prices. Although our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending, Angel Oak Mortgage Lending has no obligation to sell non-QM loans and other target assets to us and, as a result, we may need to acquire non-QM loans and other target assets from unaffiliated third parties, including through the secondary market when market conditions and asset prices are conducive to making attractive

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    purchases. In acquiring non-QM loans and other target assets from unaffiliated third parties, we compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities. Additionally, we may also compete with the U.S. Federal Reserve and the U.S. Treasury to the extent they purchase assets meeting our objectives pursuant to various purchase programs. Many of our competitors are significantly larger than us, have greater access to capital and other resources and may have other advantages over us. Our competitors may include other entities managed by Angel Oak, including with respect to loans originated by Angel Oak Mortgage Lending. See "— Risks Related to Our Relationship with Our Manager — There are conflicts of interest in our relationship with Angel Oak, including our Manager, and we may compete with existing and future managed entities of Angel Oak, which may present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders" for further information.

              In addition to existing companies, other companies may be organized for similar purposes, including companies focused on purchasing mortgage assets. A proliferation of such companies may increase the competition for equity capital and thereby adversely affect the market price of our common stock. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of assets and establish more relationships than us.

              We also may have different operating constraints from those of our competitors including, among others, (1) tax-driven constraints such as those arising from our qualifying and maintaining our qualification as a REIT, (2) restraints imposed on us as a result of maintaining our exclusion from the definition of an "investment company" or other exemptions under the Investment Company Act and (3) restraints and additional costs arising from our status as a public company. Furthermore, competition for our target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on us.

    A 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.

              There is significant uncertainty surrounding the futures of Fannie Mae and Freddie Mac. The continued flow of MBS from these GSEs, supported by their guarantees against borrower defaults, is essential to the operation of the mortgage markets in their current form, and important to our strategies. The U.S. Congress has announced its intention to consider the elimination or restructuring of these GSEs. In addition, in September 2019, the U.S. Department of Treasury released its Housing Reform Plan, which outlines potential changes to the U.S. Government's role in the mortgage market, such as recommendations to end the conservatorships of the GSEs and restructure and privatize Fannie Mae and Freddie Mac. However, no legislation has been enacted with respect to any of the foregoing, and it is not possible at this time to predict the timing of the enactment of the Housing Reform Plan, or whether the Housing Reform Plan will be enacted as proposed or at all, or the scope and nature of any other actions that the U.S. Government will ultimately take with respect to these GSEs. As a result, there can be no assurance of the continuation of Fannie Mae and Freddie Mac as currently constituted and operated. Any significant changes to the structure of these GSEs or any failure by the GSEs to honor their guarantees and other obligations could materially and adversely affect us.

    Certain actions by the U.S. Federal Reserve could materially and adversely affect us.

              Changing benchmark interest rates, and the U.S. Federal Reserve's actions and statements regarding monetary policy, can affect the fixed-income and mortgage finance markets in ways that could adversely affect the value of, and returns on, our investments, which could materially and adversely

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    affect us. Statements by the U.S. Federal Reserve regarding monetary policy and the actions it takes to set or adjust monetary policy may affect the expectations and outlooks of market participants in ways that adversely affect our investments. For example, over the past few years, statements made by the Chair and other members of the Board of Governors of the U.S. Federal Reserve and by other U.S. Federal Reserve officials regarding the U.S. economy, future economic growth, the U.S. Federal Reserve's future open market activity and monetary policy had a significant impact on, among other things, benchmark interest rates, the value of residential mortgage loans and, more generally, the fixed-income markets. These statements, the actions of the U.S. Federal Reserve, and other factors also significantly impacted many market participants' expectations and outlooks regarding future levels of benchmark interest rates and the expected yields these market participants would require to invest in fixed-income instruments.

              To the extent benchmark interest rates rise, one of the immediate potential impacts on our assets would be a reduction in the overall value of our assets and the overall value of the pipeline of mortgage loans that our Manager identifies, including from Angel Oak Mortgage Lending. Rising benchmark interest rates also generally have a negative impact on the overall cost of borrowings we may use to finance our acquisitions and holdings of assets, including as a result of the requirement to post additional margin (or collateral) to lenders to offset any associated decline in value of the assets we finance with the use of leverage. Rising benchmark interest rates may also cause sources of leverage that we may use to finance our investments to be unavailable or more limited in their availability in the future. These and other developments could materially and adversely affect us.

    We 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.

              When selling mortgage loans, sellers typically make customary representations and warranties about such loans. Our residential mortgage loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our mortgage loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to repurchase or substitution, or that our counterparty will remain solvent or otherwise be able to honor its obligations under its mortgage loan purchase agreements. Our inability to obtain indemnity or require repurchase of a significant number of loans could have a material adverse effect on us.

              Additionally, our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending. Angel Oak Mortgage Lending consists of affiliates of our Manager and, accordingly, our Manager may not require customary representations and warranties from Angel Oak Mortgage Lending concerning the loans we acquire from them and our Manager may not seek indemnity or demand repurchase or substitution of the loans in the event Angel Oak Mortgage Lending breaches a representation or warranty given to us, which could have a material adverse effect on us. See "— Risks Related to Our Relationship with Our Manager — There are conflicts of interest in our relationship with Angel Oak, including our Manager, and we may compete with existing and future managed entities of Angel Oak, which may present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders."

    We could be subject to liability for potential violations of predatory lending laws, including with respect to our non-QM loans, which could have a material adverse effect on us.

              Residential mortgage loan originators and servicers are required to comply with various U.S. federal, state and local laws and regulations, including anti-predatory lending laws and laws and regulations

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    imposing certain restrictions on requirements on "high cost" loans. Failure of residential mortgage loan originators, including Angel Oak Mortgage Lending, from whom we expect to acquire a substantial portion of our investments, or servicers to comply with these laws, to the extent any of their residential mortgage loans become part of our portfolio, could subject us, as a purchaser or an assignee of the related residential mortgage loans, to monetary penalties and could result in impairment in the ability to foreclose such loans or the borrowers rescinding the affected residential mortgage loans. Lawsuits have been brought in various states making claims against purchasers or assignees of high cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market. If the loans are found to have been originated in violation of predatory or abusive lending laws, we could incur losses, which could have a material adverse effect on us. We may face increased risks if our non-QM loans are found to have been originated in violation of predatory or abusive lending laws. See "— Risks Related to Our Investment Activities — Currently, we are focused on acquiring and investing in non-QM loans, which may subject us to legal, regulatory and other risks, which could adversely impact our business and financial results."

    We 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.

              Our business is highly dependent on communications and information systems. Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in acquiring mortgage loans or our securitization activities, which could have a material adverse effect on us. In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third parties with which we do business, including our Manager, Angel Oak Mortgage Lending, due diligence firms, pricing vendors and servicers, or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securitization transactions, if their respective systems experience failure, interruption, cyber-attacks, or security breaches.

              Computer 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. Financial services institutions have reported breaches of their systems, some of which have been significant. Even with all reasonable security efforts, not every breach can be prevented or even detected. It is possible that we have experienced an undetected breach, and it is likely that other financial institutions have experienced more breaches than have been detected and reported. There is no assurance that we, or the third parties that facilitate our business activities, have not or will not experience a breach. It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or the networks or systems of third parties that facilitate our business activities) or any failure to maintain performance, reliability and security of our technical infrastructure, but such computer malware, viruses, and computer hacking and phishing attacks may have a material adverse effect on us.

    We or Angel Oak, including our Manager, may be subject to regulatory inquiries or proceedings.

              At any time, industry-wide or company-specific regulatory inquiries or proceedings can be initiated and we cannot predict when or if any such regulatory inquiries or proceedings will be initiated that involve us or Angel Oak, including our Manager. Over the years, Angel Oak has received, and we expect in the future that they may receive, inquiries and requests for documents and information from various U.S. federal and state regulators. For example, see "Our Manager and the Management Agreement — SEC Order."

              We can give no assurances that regulatory inquiries will not result in investigations of us or Angel Oak, including our Manager, or enforcement actions, fines or penalties or the assertion of private litigation claims against us or Angel Oak, including our Manager. In the event regulatory inquiries were

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    to result in investigations, enforcement actions, fines, penalties or the assertion of private litigation claims against us or Angel Oak, including our Manager, our Manager's ability to perform its obligations to us under the management agreement could be adversely impacted, which could in turn have a material adverse effect on us.

    Our industry is highly regulated and we or Angel Oak, including our Manager, may be subject to adverse legislative or regulatory changes.

              At any time, U.S. federal, state, local or foreign laws or regulations that impact our business, or the administrative interpretations of those laws or regulations, may be enacted or amended. For example, the Dodd-Frank Act significantly revised many financial regulations. Certain portions of the Dodd-Frank Act were effective immediately, while other portions have become or will become effective following rulemaking and transition periods, but many of these changes could materially impact the profitability of our business or the business of Angel Oak, including our Manager, our access to financing or capital, and the value of the assets that we hold, and could expose us to additional costs, require changes to business practices or otherwise materially and adversely affect us. For example, the Dodd-Frank Act alters the regulation of commodity interests, imposes regulation on the over-the-counter ("OTC") derivatives market, places restrictions on residential mortgage loan originations, and reforms the asset-backed securitization markets most notably by imposing credit requirements. While there continues to be uncertainty about the exact impact of all of these changes, we do know that we and our Manager are subject to a more complex regulatory framework, and are incurring and will in the future incur costs to comply with new or recent requirements as well as to monitor compliance in the future.

              We cannot predict when or if any new law, regulation, or administrative interpretation, including those related to the Dodd-Frank Act, or any amendment to or repeal of any existing law, regulation, or administrative interpretation, will be adopted or promulgated or will become effective. Additionally, the adoption or implementation of any new law, regulation, or administrative interpretation, or any revisions in or repeals of these laws, regulations, or administrative interpretations, including those related to the Dodd-Frank Act, could cause us to change our portfolio, could constrain our strategy, or increase our costs. We could be adversely affected by any change in or any promulgation of new law, regulation, or administrative interpretation.

    Failure to obtain or maintain licenses could restrict our investment activities, which could have a material adverse effect on us.

              Certain jurisdictions require a license to purchase, hold, enforce or sell residential mortgage loans or MSRs. In the event that any licensing requirement is applicable to us, there can be no assurance that we will obtain such licenses in a timely manner or at all or in all necessary jurisdictions. In addition, even if we obtain necessary licenses, we may not be able to maintain them. Our failure to obtain or maintain such licenses could restrict our ability to invest in loans in the applicable jurisdictions. Any of these circumstances could limit our ability to invest in residential mortgage loans or MSRs and have a material adverse effect on us.

    Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations.

              We intend to conduct our operations so that neither we nor any of our subsidiaries is required to register as an investment company under the Investment Company Act. Upon the completion of this offering and our formation transactions, we will be organized as a holding company and will conduct our business through our operating partnership's wholly-owned and majority-owned subsidiaries. The securities issued to our operating partnership by any wholly-owned or majority-owned subsidiaries that it may form that are excluded from the definition of "investment company" based on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other investment securities our operating partnership may own, may not have a value in excess of 40% of the value of our operating

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    partnership's total assets on an unconsolidated basis, exclusive of U.S. Government securities and cash items. This requirement limits our ability to make certain investments and could require us to restructure our operations, sell certain of our assets or abstain from the purchase of certain assets, which could materially and adversely affect us.

              We expect that most of our investments will be held by our operating partnership's wholly-owned or majority-owned subsidiaries and that most of these subsidiaries will rely on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the Investment Company Act, which is available for entities "primarily engaged in [the business of] . . . purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion, as interpreted by the SEC staff, generally requires that at least 55% of a subsidiary's portfolio must be comprised of qualifying real estate assets and at least 80% of its portfolio must be comprised of qualifying real estate assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). For purposes of the exclusion provided by Section 3(c)(5)(C), we classify our investments based in large measure on no-action letters issued by the SEC staff and other SEC interpretive guidance and, in the absence of SEC guidance, on our view of what constitutes a qualifying real estate asset and a real estate-related asset. Although we intend to monitor our portfolio on a regular basis, there can be no assurance that we will be able to maintain this exclusion from registration for each of these subsidiaries. These requirements limit the assets those subsidiaries can own and the timing of sales and purchases of those assets, which could materially and adversely affect us.

              On August 31, 2011, the SEC published a concept release entitled "Companies Engaged in the Business of Acquiring Mortgages and Mortgage Related Instruments" (Investment Company Act Rel. No. 29778). This release notes that the SEC is reviewing the Section 3(c)(5)(C) exclusion relied upon by companies similar to us that invest in mortgage loans and mortgage-backed securities. There can be no assurance that the laws and regulations governing the Investment Company Act status of companies similar to ours, or the guidance from the SEC or its staff regarding the treatment of assets as qualifying real estate assets or real estate-related assets, will not change in a manner that adversely affects our operations as a result of this review. To the extent that the SEC or its staff provides more specific guidance regarding any of the matters bearing upon our exclusion from the need to register under the Investment Company Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could further inhibit our ability to pursue the strategies that we have chosen.

    Accounting 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.

              Accounting rules for transfers of financial assets, securitization transactions, consolidation of variable interest entities ("VIEs") and other aspects of our anticipated operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders. Changes in accounting interpretations or assumptions could impact our consolidated financial statements and our ability to timely prepare our consolidated financial statements. Our inability to timely prepare our consolidated financial statements in the future would likely materially and adversely affect us.

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    Future 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.

              We may in the future make investments through joint ventures. Such joint venture investments may involve risks not otherwise present when we make investments without partners, including the following:

      we may not have exclusive control over the investment or the joint venture, which may prevent us from taking actions that are in our best interest;

      joint venture agreements often restrict the transfer of a partner's interest or may otherwise restrict our ability to sell the interest when we desire and/or on advantageous terms;

      any future joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying the other partner's interest or selling its interest to that partner;

      we may not be in a position to exercise sole decision-making authority regarding the investment or joint venture, which could create the potential risk of creating impasses on decisions, such as with respect to acquisitions or dispositions;

      a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals;

      a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act;

      a partner may fail to fund its share of required capital contributions or may become bankrupt, which may mean that we and any other remaining partners generally would remain liable for the joint venture's liabilities;

      our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or investments underlying such relationship or may need to purchase such interests or investments at a premium to the market price to continue ownership;

      disputes between us and a partner may result in litigation or arbitration that could increase our expenses and prevent our Manager and our officers and directors from focusing their time and efforts on our business and could result in subjecting the investments owned by the joint venture to additional risk; or

      we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely affect our qualification and maintenance of our qualification as a REIT and maintenance of our exclusion from regulation as an investment company under the Investment Company Act, even though we do not control the joint venture.

              Any of the above may subject us to liabilities in excess of those contemplated and adversely affect the value of our future joint venture investments.

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    If 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.

              The manner in which we compete and the types of assets in which we seek to invest will be affected by changing conditions resulting from sudden changes in our industry, regulatory environment, the role of GSEs, the role of credit rating agencies or their rating criteria or process, or the U.S. and global economies generally. If we do not effectively respond to these changes, or if our strategies to respond to these changes are not successful, we may be materially and adversely affected. In addition, we may not be successful in executing our business strategies and, even if we successfully implement our business strategies, we may not ever generate revenues or profits.

    Terrorist attacks, other acts of violence or war, civil unrest or a pandemic, such as the recent outbreak of the COVID-19 pandemic and its evolving risks, 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.

              We cannot predict the severity of the effect that potential terrorist attacks, other acts of violence or war, civil unrest or a pandemic, or U.S. consumers' fears of such events, may have on the U.S. economy and on our business, financial condition and results of operations. We may suffer losses as a result of the adverse impact of any of these events, including from COVID-19, and these losses may adversely impact our performance and may cause the market value of shares of our common stock to decline or be more volatile. A prolonged economic slowdown, a recession, or declining real estate values could impair the performance of our investments and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Losses resulting from these types of events may not be fully insurable. For a discussion of the impacts of the COVID-19 pandemic on us, see "— Risks Related to the COVID-19 Pandemic — The COVID-19 pandemic, measures intended to prevent its spread and government actions to mitigate its economic impact have caused, and are expected to continue to cause, severe and unprecedented disruptions in the U.S. and global economies and financial markets, and had an adverse effect on us in the past and could have a material adverse effect on us in the future."

              The absence of affordable insurance coverage for these types of events may adversely affect the general real estate lending market, lending volume and the market's overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties underlying our interests are unable to obtain affordable insurance coverage, the value of our interests could decline, and in the event of an uninsured loss, we could lose all or a portion of our investment.

    Risks Related to Our Financing and Hedging

    We may incur significant debt, which will subject us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur.

              As of December 31, 2020, we had approximately $260.2 million of debt outstanding, including approximately $81.9 million outstanding under our three loan financing lines with a combination of global money center and large regional banks, which permit borrowings in an aggregate amount of up to $525.0 million, and approximately $178.3 million outstanding under short-term repurchase facilities. We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we expect to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long-term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements. We may also issue additional equity, equity-related and debt securities to fund our strategy.

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              Our charter, bylaws and investment guidelines require no minimum or maximum leverage and our Manager will have the discretion, without the need for further approval by our Board of Directors, to change both our overall leverage and the leverage used for individual asset classes. Because our strategy is flexible, dynamic and opportunistic, our overall leverage and the leverage used for individual asset classes will vary over time. As of December 31, 2019, our leverage ratio was approximately 3.82x total debt to total equity, which included debt from our loan financing lines and repurchase facilities, but excluded debt in our non-recourse securitization transactions. We expect our leverage ratio to decrease over time as our RMBS portfolio, which is financed with our repurchase facilities at a rate generally less than 1:1 debt to equity, becomes a larger percentage of our overall portfolio. As of December 31, 2020, our leverage ratio fell to 1.05x total debt to total equity, due to the AOMT 2020-3 securitization in June 2020 and the resulting lower amount of residential mortgage loans held at December 31, 2020. We expect that our leverage ratio will increase in the near term as we continue to purchase additional loans from Angel Oak Mortgage Lending over the next few quarters, and generally will remain at less than 3:1 over time but may exceed this ratio from time to time.

              Following the completion of this offering and our formation transactions, we expect that our financing sources will primarily include the net proceeds of this offering, payments of principal and interest we receive on our portfolio, cash generated from operations and unused borrowing capacity under our in-place loan financing lines and repurchase facilities, as well as additional financing sources. Depending on market conditions, we expect that our primary sources of financing going forward will include securitizations, loan financing lines and repurchase facilities. In the future, we may also utilize other types of borrowings, including bank credit facilities and warehouse lines of credit, among others. We may also seek to raise additional capital through public or private offerings of equity, equity-related or debt securities, depending upon market conditions. The use of any particular source of capital and funds will depend on market conditions, availability of these sources and the investment opportunities available to us.

              Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that:

      our cash flow from operations may be insufficient to make required payments of principal of and interest on our debt, which is likely to result in (1) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision), which we then may be unable to repay from internal funds or to refinance on favorable terms, or at all, (2) our inability to borrow undrawn amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, which would result in a decrease in our liquidity, and/or (3) the loss of some or all of our collateral assets to foreclosure or sale;

      our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase in an amount sufficient to offset the higher financing costs;

      we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, stockholder distributions or other purposes; and

      we may not be able to refinance any debt that matures prior to the maturity (or realization) of an underlying investment it was used to finance on favorable terms or at all.

              There can be no assurance that our leverage strategy will be successful, and our leverage strategy may cause us to incur significant losses, which could materially and adversely affect us.

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    Our 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.

              We depend upon the availability of adequate capital and financing sources to fund our operations. Our lenders include or are expected to include global money center and large regional banks, with exposures both to global financial markets and to more localized conditions. Whether because of a global or local financial crisis or other circumstances, if one or more of our lenders experiences severe financial difficulties, they or other lenders could become unwilling or unable to provide us with financing, or could increase the costs of that financing, or could become insolvent. Moreover, we are currently party to short-term borrowings (in the form of loan financing lines and repurchase facilities) and there can be no assurance that we will be able to replace these borrowings, or "roll" them, as they mature on a continuous basis and it may be more difficult for us to obtain debt financing on favorable terms or at all. In addition, if regulatory capital requirements imposed on our lenders change, they may be required to limit, or increase the cost of, financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price. Consequently, depending on market conditions at the relevant time, we may have to rely on additional equity issuances to meet our capital and financing needs, which may be dilutive to our stockholders, or we may have to rely on less efficient forms of debt financing that consume a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to our stockholders and other purposes. We cannot assure you that we will have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which may cause us to curtail our asset acquisition activities and/or dispose of assets, which could materially and adversely affect us.

    We use leverage in executing our business strategy, which may materially and adversely affect us.

              We use leverage in connection with the investment in and holding of mortgage loans and other assets, and we have financed, and expect to continue to finance, a substantial portion of our mortgage loans through securitizations. As of December 31, 2020, our leverage ratio was approximately 1.05x total debt to total equity, which included debt from our loan financing lines and repurchase facilities, but excluded debt in our non-recourse securitization transactions.

              Leverage will magnify both the gains and the losses on an investment. Leverage will increase our returns as long as we earn a greater return on investments purchased with borrowed funds than our cost of borrowing such funds. However, if we use leverage to acquire an asset and the value of the asset decreases, the leverage will increase our losses. Even if the asset increases in value, if the asset fails to earn a return that equals or exceeds our cost of borrowing, the leverage will decrease our returns.

              We may be required to post large amounts of cash as collateral or margin to secure our leveraged positions. In the event of a sudden, precipitous drop in the value of our financed assets, we might not be able to liquidate assets quickly enough to repay our borrowings, further magnifying losses. See "— Our 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." Even a small decrease in the value of a leveraged asset may require us to post additional margin or cash collateral. This may materially and adversely affect us.

    Market conditions and other factors may affect our ability to securitize assets, which could increase our financing costs and materially and adversely affect us.

              In March 2019, we contributed loans with a carrying value of approximately $255.7 million that we had accumulated and held on our balance sheet to AOMT 2019-2. The remaining non-QM loans that we contributed to AOMT 2019-2 were purchased from affiliated and unaffiliated entities. AOMT 2019-2 issued approximately $620.9 million in face value of bonds in the securitization transaction. Additionally,

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    in July 2019, we contributed loans with a carrying value of approximately $147.4 million that we had accumulated and held on our balance sheet to AOMT 2019-4's securitization transaction. AOMT 2019-4 issued approximately $558.5 million face value of in bonds in the securitization transaction. Furthermore, in November 2019, we contributed loans with a carrying value of approximately $104.3 million that we had accumulated and held on our balance sheet to AOMT 2019-6's securitization transaction. AOMT 2019-6 issued approximately $544.5 million face value of in bonds in the securitization transaction. Additionally, in June 2020, we contributed loans with a carrying value of approximately $482.9 million that we had accumulated and held on our balance sheet to AOMT 2020-3's securitization transaction. AOMT 2020-3 issued approximately $530.3 million in face value of bonds in the securitization transaction. We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we expect to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long-term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements, but also exposes us to the risk of first loss. Our ability to continue to obtain permanent non-recourse financing through securitizations is affected by a number of factors, including:

      conditions in the securities markets, generally;

      conditions in the asset-backed securities markets, specifically;

      yields on our portfolio of mortgage loans;

      the credit quality of our portfolio of mortgage loans; and

      our ability to obtain any necessary credit enhancement.

              Securitization markets are negatively impacted by any factors which reduce liquidity, increase risk premiums for issuers, reduce investor demand, cause financial distress among financial guaranty insurance providers, or by a general tightening of credit and/or increased regulation. Conditions such as these may from time to time result in a delay in the timing of our securitization of mortgage loans or may reduce or even eliminate our ability to securitize mortgage loans and sell securities in the RMBS or CMBS market, any of which would increase the cost of funding our mortgage loan portfolio. Our loan financing lines may not be adequate to fund our mortgage loan purchasing activities until such time as disruptions in the securitization markets subside. This would require us to hold the mortgage loans we acquire on our balance sheet, which would significantly delay our ability to fund the acquisition of additional mortgage loans or use equity capital to acquire any other target assets. Disruptions in the securitization market, including any adverse change, delay or inability to access the securitization market, could therefore materially and adversely affect us.

              Low investor demand for asset-backed securities could also force us to hold mortgage loans until investor demand improves, but our capacity to hold such mortgage loans in our portfolio is not unlimited. Additionally, adverse market conditions could result in increased costs and reduced margins earned in connection with our securitization transactions.

              Our ability to execute securitizations may be impacted, delayed, limited or precluded by legislative and regulatory reforms applicable to asset-backed securities and the institutions that sponsor, service, rate or otherwise participate in, or contribute to, the successful execution of a securitization transaction. With respect to any securitization transaction engaged in by us, these factors could limit, delay, or preclude our ability to execute securitization transactions and could also reduce the returns we would otherwise expect to earn in connection with securitization transactions.

              The Dodd-Frank Act imposed significant changes to the legal and regulatory framework applicable to the asset-backed securities markets and securitizations, directing various U.S. federal regulators to engage in rulemaking actions aimed at dramatically reforming regulation of U.S. financial markets.

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    Included among those changes were the adoption of several new rules by the SEC as part of Regulation AB II, which set forth new disclosure requirements for securitization transactions, and the joint establishment of the U.S. Risk Retention Rules by a group of U.S. federal regulators, which require that the sponsors of securitizations retain a minimum of 5% of the credit risk of the assets collateralizing any securitization transaction they bring to market. While many of the rulemakings required by the Dodd-Frank Act have been finalized and are either effective or pending effectiveness, others remain to be finalized or even proposed. Further, many of the rules that have been finalized have been subject to modification or interpretation since their effective date, oftentimes in order to clear up ambiguities present in the final rules. Accordingly, it is difficult to predict with certainty how the Dodd-Frank Act and the other regulations that have been proposed, finalized or recently implemented will affect our ability to execute securitizations.

              In addition to the Dodd-Frank Act, its related rules and Regulation AB II, other U.S. federal or state laws and regulations that could affect our ability to execute securitization transactions may be proposed, enacted, or implemented. These laws and regulations could effectively preclude us from executing securitization transactions, could delay our execution of these types of transactions, or could reduce the returns we would otherwise expect to earn from executing securitization transactions.

              Other matters, such as (1) accounting standards applicable to securitization transactions and (2) capital and leverage requirements applicable to banks and other regulated financial institutions that traditionally purchase and hold asset-backed securities, could result in less investor demand for securities issued through securitization transactions or increased competition from other institutions that execute securitization transactions.

    The securitization process is subject to an evolving regulatory environment that may affect certain aspects of our current business.

              As a result of the dislocation of the credit markets during the previous recession, and in anticipation of more extensive regulation, including regulations promulgated pursuant to the Dodd-Frank Act, the securitization industry has crafted and continues to craft changes to securitization practices, including changes to representations and warranties in securitization transaction documents, new underwriting guidelines and disclosure guidelines. Pursuant to the Dodd-Frank Act, various U.S. federal agencies, including the SEC, have promulgated regulations with respect to issues that affect securitizations.

              On October 21, 2014, the U.S. Risk Retention Rules were issued and have since become effective with respect to all asset classes. The U.S. Risk Retention Rules generally require the sponsor of a securitization to retain not less than 5% of the credit risk of the assets collateralizing the issuer's securities. When applicable, the U.S. Risk Retention Rules generally require the "securitizer" of a "securitization transaction" to retain at least 5% of the "credit risk" of "securitized assets," as such terms are defined for purposes of that statute, and generally prohibit a securitizer from directly or indirectly eliminating or reducing its credit exposure by hedging or otherwise transferring the credit risk that the securitizer is required to retain.

              On February 9, 2018, a three-judge panel of the U.S. Court of Appeals for the District of Columbia held, in The Loan Syndications and Trading Association v. Securities and Exchange Commission and Board of Governors of the Federal Reserve System, No. 1:16-cv-0065 (the "LSTA Decision") that collateral managers of "open market CLOs" (described in the LSTA Decision as collateralized loan obligations where assets are acquired from "arms-length negotiations and trading on an open market") are not "securitizers" or "sponsors" under Section 941 of the Dodd-Frank Act and, therefore, are not subject to risk retention and do not have to comply with the U.S. Risk Retention Rules. In reaching this decision, the panel determined, among other things, that an asset manager that was not in the chain of title on the transferred assets could not be required to "retain" risk that it had never held. Although the LSTA Decision is limited by its terms to asset managers of "open market CLOs," the court's analysis may have

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    broader implications with respect to compliance with the U.S. Risk Retention Rules, especially in the context of managed funds that utilize securitizations.

              The current regulatory environment may be impacted by future legislative developments, such as amendments to key provisions of the Dodd-Frank Act, including provisions setting forth capital and risk retention requirements. On February 3, 2017, President Trump signed an executive order calling for the administration to review U.S. financial laws and regulations in order to determine their consistency with a set of core principles identified in the order. The full scope of President Trump's short-term legislative agenda is not yet fully known, but it may include certain deregulatory measures for the U.S. financial services industry, including changes to the Financial Stability Oversight Council (the "FSOC"), the Volcker Rule and credit risk retention requirements, among other areas. In particular, on June 8, 2017, one pending bill, called the Financial CHOICE Act (the "CHOICE Act") was passed by the U.S. House of Representatives. If passed by the U.S. Senate and signed into law by President Trump, the CHOICE Act would, among other things, remove risk retention requirements for non-residential mortgage securitizations. In addition, on May 24, 2018, a financial services regulatory reform bill that received bipartisan support, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act") was signed into law by President Trump. The Economic Growth Act makes certain modifications to post-financial crisis regulatory requirements, including, among other things, improving consumer access to mortgage credit and tailoring regulations for certain bank holding companies, including raising the relevant thresholds for the application of the U.S. Federal Reserve's enhanced prudential standards, as well as for the designation by the FSOC of non-bank financial companies as systemically important. While such legislation will result in significant modifications to certain aspects of the Dodd-Frank Act and other post-financial crisis regulatory requirements, the immediate impact of such legislation remains uncertain.

              These legislative developments, and other proposed regulations affecting securitizations, could alter the structure of securitizations in the future, pose additional risks to our participation in future securitizations or reduce or eliminate the economic incentives for participating in future securitizations, increase the costs associated with our acquisition or securitization activities, or otherwise increase the risks or costs of our doing business.

    We may be unable to profitably execute securitization transactions, which could materially and adversely affect us.

              A number of factors may determine whether a securitization transaction that we execute or participate in is profitable. One such factor is the price at which we acquire the mortgage loans that we intend to securitize, which may be impacted by, among other things, the level of competition in the marketplace or the relative desirability to originators, including Angel Oak Mortgage Lending, of retaining mortgage loans as investments versus selling them to third parties such as us. See "— Risks Related to Our Relationship with Our Manager — We rely on Angel Oak Mortgage Lending to source non-QM loans and other target assets for acquisition by us and they are under no contractual obligation to sell to us any loans that it originates." Another factor that impacts the profitability of a securitization transaction is the cost of the short-term debt used to finance our holdings of mortgage loans after acquisition and prior to securitization. This cost may vary depending on the availability of short-term financing, interest rates, the duration of the financing, and the extent to which third parties are willing to provide such financing. Additionally, the value of mortgage loans held by us prior to securitization may vary over the course of the holding period due to changes in interest rates or the credit quality of the mortgage loans. To the extent we seek to hedge against interest rate fluctuations that affect loan value, the cost of any hedging transaction will decrease returns on the respective securitization transaction. The price that investors pay for securities issued in our securitization transactions will also significantly affect our profitability margin. Additionally, in effecting securitization transactions, we may incur transaction costs or may incur or be required to make reserves for any liability in connection with executing a transaction, and such costs can also reduce the profitability of a transaction. To the extent

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    that we are not able to profitably execute securitizations of mortgage loans, we could be materially and adversely affected.

              Rating agencies have historically played a central role in the securitization markets. Many purchasers of asset-backed securities require that a security be rated by the agencies at or above a specific grade before they will consider purchasing it. The rating agencies could adversely affect our ability to execute securitization transactions by deciding not to publish ratings for our securitization transactions or assigning ratings that are below the thresholds investors require. Further, rating agencies could alter their ratings processes or criteria after we have accumulated loans for securitization in a manner that reduces the value of previously acquired loans or that requires us to incur additional costs to comply with those processes and criteria.

    Our securitization transactions may result in litigation, which could materially and adversely affect us.

              In connection with our past securitization transaction and future securitization transactions, we have prepared, or will prepare, disclosure documentation, including term sheets and offering memoranda, which contained, or will contain, disclosures regarding the securitization transactions and the assets being securitized. If such disclosure documentation is alleged or found to contain inaccuracies or omissions, we may be liable under U.S. federal securities laws, state securities laws or other applicable laws for damages to third parties that invest in these securitization transactions, including in circumstances in which we relied on a third party in preparing accurate disclosures, or we may incur other expenses and costs in connection with disputing these allegations or settling claims. We may also sell or contribute mortgage loans to third parties who, in turn, securitize those loans. In these circumstances, we may also prepare disclosure documentation, including documentation that is included in term sheets and offering memoranda relating to those securitization transactions. We could be liable under U.S. federal securities laws, state securities laws or other applicable laws for damages to third parties that invest in these securitization transactions, including liability for disclosures prepared by third parties or with respect to loans that we did not sell or contribute to the securitization.

              In recent years, there has also been debate as to whether there are defects in the legal process and legal documents governing transactions in which securitization trusts and other secondary purchasers take legal ownership of mortgage loans and establish their rights as first priority lien holders on underlying mortgaged property. To the extent there are problems with the manner in which title and lien priority rights were or are established or transferred, the securitization transaction that we have sponsored, or securitization transaction that we will sponsor, and third-party sponsored securitizations in which we will hold investments, we may be materially and adversely affected.

              Defending a lawsuit can consume significant resources and may divert our and our Manager's attention from our operations. We may be required to establish reserves for potential losses from litigation, which could be material. To the extent we are unsuccessful in our defense of any lawsuit, we could suffer losses which could be in excess of any reserves established relating to that lawsuit, which could materially and adversely affect us.

    Our securitization transactions may be on significantly less advantageous terms than we had anticipated and we may be materially and adversely affected.

              A substantial portion of our portfolio is expected to consist of non-QM loans originated by Angel Oak Mortgage Lending and other target assets acquired from Angel Oak Mortgage Lending and RMBS and CMBS acquired from AOMT securitization vehicles affiliated with us, which creates certain conflicts of interest. See "— Risks Related to Our Relationship with Our Manager — There are conflicts of interest in our relationship with Angel Oak, including our Manager, and we may compete with existing and future managed entities of Angel Oak, which may present various conflicts of interest that restrict our

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    ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders."

              In connection with our securitizations of mortgage loans into "real estate mortgage investment conduit" ("REMIC") securities backed by mortgage loans or other assets ("REMIC Certificates"), (1) our TRS will sell a substantial portion of the loans it purchases from Angel Oak Mortgage Lending or unaffiliated third parties to an AOMT securitization vehicle; (2) we or another affiliate will be expected to purchase one or more tranches of the REMIC Certificates issued by such AOMT securitization vehicle, including any securities required to be retained pursuant to the U.S. Risk Retention Rules; (3) our TRS will make certain representations and warranties about the underlying assets and assume the obligation to repurchase or replace those assets in certain circumstances if those representations or warranties are untrue; and/or (4) our TRS and/or we will guarantee the obligations of certain of the entities included in Angel Oak Mortgage Lending to repurchase or replace those assets in certain cases if the representations or warranties made by Angel Oak Mortgage Lending about those assets are untrue or if certain covenants made regarding the servicing of those assets by Angel Oak Mortgage Lending are breached and, in any case, the related Angel Oak Mortgage Lending entity does not repurchase or replace the assets itself. In such event, we will be contractually obligated to repurchase loans at a price that exceeds their market value at the time that they are subject to our repurchase obligation. Additionally, a guarantee of the obligations of ours or any of our subsidiaries under any agreements we enter into in connection with a securitization may be required from us.

              Due to general market conditions, the performance of the related loans, the performance of prior loans originated by Angel Oak Mortgage Lending or other investments, RMBS or CMBS originated by AOMT or other reasons, our consummation of the securitization utilizing those loans may be on significantly less advantageous terms than we had anticipated and we may be materially and adversely affected.

    Our loan financing lines subject us to additional risks, which could materially and adversely affect us.

              We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization. Loan financing lines involve either the sale of a loan by us and our agreement to repurchase the loan at a specified time and price (thereby financing our acquisition of such loan) or the purchase by us of a loan with an agreement to resell it to the seller at a specified time and price. Such transactions afford an opportunity for us to invest temporarily available cash or to leverage our assets. If the counterparty to a loan financing line to whom a loan is sold should default, as a result of bankruptcy or otherwise, we could experience delays in liquidating the underlying loan, resulting in a lack of access to income on the underlying loan during this period and expenses in our enforcement of our rights. Ultimately, we may not be able to recover the loans sold, which could result in a loss to us if the value of such loans has increased over their repurchase price. If we act as the purchaser under a loan financing line, a risk exists that the seller will not pay to us the agreed upon sum on the delivery date at which point we would generally be entitled to sell the relevant loans that we purchased. However, if the value of such loans has declined, then we may be unable to recover the full repurchase price and this could materially and adversely affect us.

    Our 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.

              Our loan financing lines and our future loan financing lines and derivative contracts, such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts or options, may allow our lenders and derivative counterparties, as the case may be, to varying degrees, to determine an updated market value of our collateral and derivative contracts to reflect current market conditions. If the market value of our collateral or our derivative contracts with a

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    particular lender or derivative counterparty declines in value, we may be required by the lender or derivative counterparty to provide additional collateral or repay a portion of the funds advanced on minimal notice, which is known as a margin call. Posting additional collateral will reduce our liquidity and limit our ability to leverage our assets. Additionally, in order to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could materially and adversely affect us. We have received, and may in the future receive, margin calls from our lenders and derivative counterparties from time to time in the ordinary course of business. In the event we default on our obligation to satisfy these margin calls, our lenders or derivative counterparties can accelerate our indebtedness, terminate our derivative contracts (potentially on unfavorable terms requiring additional payments, including additional fees and costs), increase our borrowing rates, liquidate our collateral and terminate our ability to borrow. In certain cases, a default on one loan financing line or derivative contract (whether caused by a failure to satisfy margin calls or another event of default) can trigger "cross defaults" on other such agreements. A significant increase in margin calls could materially and adversely affect us, and could increase our risk of insolvency.

              To the extent we might be compelled to liquidate qualifying real estate assets to repay debts, our compliance with the REIT requirements regarding our assets and our sources of income could be negatively affected, which could jeopardize our qualification as a REIT. Losing our REIT qualification would cause us to be subject to U.S. federal income tax (and any applicable state and local taxes) on all of our income and decrease profitability and cash available for distributions to our stockholders. Additionally, if we are compelled to liquidate qualifying real estate assets to repay debts, this could jeopardize our exclusion from regulation as an investment company under the Investment Company Act.

    Our 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.

              In the event of our insolvency or bankruptcy, certain loan financing lines may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on and/or liquidate the collateral pledged under such agreements without delay. In the event of the insolvency or bankruptcy of a lender during the term of a loan financing line, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our assets under a loan financing line or to be compensated for any damages resulting from the lenders' insolvency may be further limited by those statutes. These claims would be subject to significant delay and costs to us and, if and when received, may be substantially less than the damages we actually incur.

    Interest rate fluctuations could increase our financing costs, which could materially and adversely affect us.

              Our primary interest rate exposures relate to the yield on our loans and the financing cost of our debt, as well as any interest rate swaps utilized for hedging purposes. Changes in interest rates affect our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in financing these assets. In a period of rising interest rates, our interest expense on floating rate debt would increase, while any additional interest income we earn on floating rate assets may not compensate for such increase in interest expense and the interest income we earn on fixed rate assets would not change. Similarly, in a period of declining interest rates, our interest income on floating rate assets would decrease, while any decrease in the interest we are charged on our floating rate debt may not compensate for such decrease in interest income and the interest expense we incur on our fixed rate debt would not change. Consequently, changes in interest rates may significantly influence our net income. Interest rate fluctuations resulting in our interest

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    expense exceeding interest income would result in operating losses, which could materially and adversely affect us. Changes in the level of interest rates also may affect our ability to acquire loans, the value of our investments and our ability to realize gains from the disposition of assets. Moreover, changes in interest rates may affect borrower default rates.

    Hedging against interest rate changes and other risks may materially and adversely affect us.

              As of December 31, 2020, we had approximately $260.2 million of debt outstanding, consisting of approximately $178.3 million which bears interest at a fixed rate, and approximately $81.9 million which bear interest at a floating rate. Subject to qualifying and maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. For example, we may opportunistically enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts and options. Hedging may fail to protect or could adversely affect us because, among other things:

      interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

      available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

      the duration of the hedge may not match the duration of the related assets or liabilities being hedged;

      most hedges are structured as OTC contracts with private counterparties, raising the possibility that the hedging counterparty may default on its obligations;

      to the extent that the creditworthiness of a hedging counterparty deteriorates, it may be difficult or impossible to terminate or assign any hedging transactions with such counterparty to another counterparty;

      to the extent hedging transactions do not satisfy certain provisions of the Code and are not made through a TRS, the amount of income that a REIT may earn from hedging transactions to offset interest rate losses is limited by U.S. federal tax provisions governing REITs;

      the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value (i.e. our operating results may suffer because losses, if any, on the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction or item). Downward adjustments, or "mark-to-market losses," would reduce our earnings and our stockholders' equity;

      we may fail to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the assets in the portfolio being hedged;

      our Manager may fail to recalculate, re-adjust, and execute hedges in an efficient and timely manner; and

      the hedging transactions may actually result in poorer overall performance for us than if we had not engaged in the hedging transactions.

              Our hedging transactions, which would be intended to limit losses, may actually adversely affect our earnings, which could materially and adversely affect us.

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    Our hedging activities may expose us to additional risks.

              Subject to qualifying and maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. For example, we may opportunistically enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts and options. However, it is impossible to fully hedge our investments. Furthermore, certain hedging transactions could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could materially and adversely affect us.

              To the extent that any hedging strategy involves the use of OTC derivatives transactions, such a strategy would be affected by implementation of various regulations adopted pursuant to the Dodd-Frank Act. OTC derivative dealers are now required to register with the U.S. Commodity Futures Trading Commission (the "CFTC") and will ultimately be required to register with the SEC. Registered swap dealers will be subject to minimum capital and margin requirements and are subject to business conduct standards, disclosure requirements, reporting and recordkeeping requirements, transparency requirements, position limits, limitations on conflicts of interest, and other regulatory burdens. These requirements further increase the overall costs for OTC derivative dealers, which costs may be passed along to market participants as market changes continue to be implemented. The overall impact of the Dodd-Frank Act on us remains highly uncertain and it is unclear how the OTC derivatives markets will adapt to this new regulatory regime, along with additional, sometimes overlapping, regulatory requirements imposed by non-U.S. regulators.

              Although the Dodd-Frank Act will require many OTC derivative transactions previously entered into on a principal-to-principal basis to be executed through a regulated securities, futures or swap exchange or facility and/or submitted for clearing by a regulated clearinghouse, not all of our derivative transactions will be subject to the clearing requirements. The "bid-ask" spreads may be unusually wide in these heretofore substantially unregulated markets. The risk of counterparty nonperformance can be significant in the case of these OTC instruments, and although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. A liquid secondary market may not exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. While the Dodd-Frank Act is intended to bring more stability and lower counterparty risk to the derivatives market by requiring central clearing of certain standardized derivatives trades, not all of our trades are or will be subject to a clearing requirement because the trades are grandfathered or because they are bespoke, or because they are within a class that is not currently subject to mandatory clearing. Furthermore, it is yet to be seen whether the Dodd-Frank Act will be effective in reducing counterparty risk or if such risk may actually increase as a result of market uncertainty, mutuality of loss to clearinghouse members, or other reasons.

              Further, Title VII of the Dodd-Frank Act requires that certain derivative instruments be centrally cleared and executed through an exchange or other approved trading platform, which could result in increased costs in the form of intermediary fees and additional margin requirements imposed by derivatives clearing organizations and their respective clearing members.

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              In addition, under Title VII of the Dodd-Frank Act, the SEC, the CFTC and U.S. federal banking regulators were required to adopt margin requirements for uncleared OTC swaps and security-based swaps for certain regulated entities. The U.S. federal banking regulators and the CFTC have adopted final rules imposing margin requirements for uncleared swaps (other than physically-settled foreign exchange ("FX") forward and FX swaps), the initial margin requirements of which are being phased-in between September 2016 and September 2020, and the variation margin requirements, which went into effect in March 2017 for all market participants subject to these uncleared swap margin rules. Such margin requirements may also result in increased costs and could adversely affect our ability to use derivatives to hedge our risks in the future and/or to amend or novate existing swaps after the date on which we are required to comply with the rules.

              Title VII of the Dodd-Frank Act also created new categories of regulated market participants, such as "swap-dealers," "security-based swap dealers," "major swap participants" and "major security-based swap participants," and subjects these regulated entities to significant new capital, registration, recordkeeping, reporting, disclosure, business conduct and other regulatory requirements that have given rise to administrative costs which may be passed on and applied to transaction costs incurred by us.

    Changes in regulations relating to swaps activities may cause us to limit our swaps activity or subject us and our Manager to additional disclosure, recordkeeping, and other regulatory requirements.

              The enforceability of swap agreements underlying hedging transactions may depend on compliance with applicable derivatives regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. Recently, new regulations have been promulgated by U.S. and foreign regulators attempting to strengthen the oversight of derivatives contracts, including swap agreements and futures contracts. Any actions taken by regulators could constrain our strategy and could increase our costs, either of which could materially and adversely affect us. In particular, the Dodd-Frank Act requires many swap agreements to be executed on a regulated exchange and cleared through a central clearinghouse, which may result in increased margin requirements and costs. Regulators have also recently required swap dealers to collect margin on the uncleared swap transactions that they enter into with financial entities such as mortgage REITs, thereby potentially also increasing our costs. Furthermore, a mortgage REIT that enters into derivatives transactions, including swap agreements and futures contracts, may be considered to be a regulated commodity pool that is required to be operated by a registered or exempt "commodity pool operator." On December 7, 2012, the CFTC issued a No-Action Letter that provides mortgage REITs relief from such commodity pool operator registration requirement (the "No-Action Letter") if they meet certain conditions and submit a claim for such no-action relief by email to the CFTC. We believe we meet the conditions set forth in the No-Action Letter and have filed our claim with the CFTC to perfect the use of the no-action relief from commodity pool operator registration. However, if in the future we do not meet the conditions set forth in the No-Action Letter or the relief provided by the No-Action Letter becomes unavailable for any other reason, we may need to seek to obtain an alternative exemption from registration for our Manager, which is currently not registered as a commodity pool operator with the CFTC, and we may become subject to additional compliance, disclosure, recordkeeping and reporting requirements, which may increase our costs and materially and adversely affect us.

    Risks Related to Our Organizational Structure

    Upon the completion of this offering and our formation transactions, our significant stockholders, including the MS Entity, the DK Entity and the Vivaldi Entity, and their respective affiliates, will have significant influence over us and their actions might not be in your best interest as a stockholder.

              Upon the completion of this offering and our formation transactions, the MS Entity, the DK Entity and the Vivaldi Entity will beneficially own approximately         %,         % and         %, respectively, of our

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    outstanding common stock (based on the mid-point of the price range indicated on the front cover page of this prospectus). As a result, each of the MS Entity, the DK Entity and the Vivaldi Entity will have significant influence in the election of our directors, who will exercise overall supervision and control over us and our subsidiaries.

              In addition, pursuant to the MS shareholder rights agreement that we and our Manager intend to enter into with the MS Entity prior to the completion of this offering, the MS Entity, subject to certain limitations, will have the right to designate one nominee for election to our Board of Directors for so long as the MS Entity and its affiliates beneficially own, in the aggregate, shares of our common stock representing at least 10% of the shares of our common stock then outstanding (excluding shares of our common stock that are subject to issuance upon the exercise or exchange of rights of conversion, or any options, warrants or other rights to acquire shares of our common stock). Furthermore, pursuant to the DK shareholder rights agreement that we and our Manager intend to enter into with the DK Entity prior to the completion of this offering, the DK Entity, subject to certain limitations, will have the right to designate one nominee for election to our Board of Directors for so long as the DK Entity and its affiliates (1) maintain beneficial ownership of shares of our common stock equal to at least 10% of the shares of our common stock then outstanding or (2) are one of the largest three (3) beneficial owners of shares of our common stock and maintain beneficial ownership, in the aggregate, of shares of our common stock equal to at least 7% of the shares of our common stock then outstanding. For purposes of the ownership requirements in the DK shareholder rights agreement, shares of our common stock that are subject to issuance upon the exercise or exchange of rights of conversion, or any options, warrants or other rights to acquire shares, will not be counted as outstanding. Additionally, one of our directors is affiliated with the Vivaldi Entity. These and other fund investors were granted rights to receive a share of our Manager's revenues received under the management agreement in connection with their investments prior to this offering.

              Additionally, the MS Entity, the DK Entity and the Vivaldi Entity, as fund investors, will enter into a registration rights agreement with us in connection with this offering, pursuant to which they will be entitled to registration rights in respect of shares of our common stock. For further information regarding this registration rights agreement, please see "Certain Relationships and Related Party Transactions — Registration Rights Agreements" and "Shares Eligible for Future Sale — Registration Rights."

              We expect that each of the MS Entity, the DK Entity and the Vivaldi Entity will continue to exert a significant influence on our business and affairs upon the completion of this offering as a result of their substantial ownership interest in us and the terms of our shareholder rights agreements and our stockholder's agreement, as applicable. As a result, we expect that each of these parties will continue to influence the outcome of matters required to be submitted to stockholders for approval, including the election of our directors, amendments to our charter, the removal of our directors for cause, and the approval of significant transactions, such as mergers or other sales of our company or our assets.

              The influence exerted by these stockholders over our business and affairs might not be consistent with your best interests as a stockholder and their receipt of a share of the fees received by our Manager under the management agreement may result in their interests not being aligned with the interests of other stockholders. In addition, this concentration of voting control and influence may have the effect of delaying, deferring or preventing a transaction or change in control of us which might involve a premium price for shares of our common stock or otherwise be in your best interest as a stockholder.

    Our 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.

              Our Board of Directors oversees the business and affairs of our company and determines our strategies, including our strategies regarding investments, financing, growth, debt capitalization and

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    distributions. Our Board of Directors may amend or revise these and other strategies without a vote of our stockholders. In addition, our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without approval of our stockholders, if it determines that it is no longer in our best interest to attempt to, or continue to, qualify as a REIT. Accordingly, our stockholders' ability to control our operations is limited, which could negatively affect the value of our common stock.

    Certain provisions of Maryland law could inhibit a change in control.

              Certain provisions of the MGCL may have the effect of deterring a third party from making a proposal to acquire us or of inhibiting a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. Under the MGCL, certain "business combinations" (including a merger, consolidation, statutory share exchange or, in certain circumstances specified under the statute, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any interested stockholder (as defined in the statute) or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (2) two-thirds of the votes entitled to be cast by holders of shares of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These two supermajority votes are not required if, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a corporation's board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board of Directors has adopted a resolution exempting any business combination between us and any other person or group of persons from the provisions of this statute. There is no assurance that our Board of Directors will not amend or revoke this exemption in the future.

              The MGCL provides that holders of "control shares" (defined as shares of voting stock that, if aggregated with all other shares of stock previously acquired by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise or direct the exercise of voting power in electing directors within one of three increasing ranges of voting power in electing directors) of a Maryland corporation acquired in a "control share acquisition" (defined as the acquisition, directly or indirectly, of ownership of, or the power to exercise or direct the exercise of voting power (other than solely by revocable proxy) with respect to, issued and outstanding "control shares," subject to certain exceptions) have no voting rights with respect to those shares except to the extent approved by the affirmative vote of at least two-thirds of the votes entitled to be cast by stockholders entitled to exercise or direct the exercise of the voting power in the election of directors generally, excluding all interested shares. Our bylaws contain a provision exempting from the control share acquisition statute any and all control share acquisitions by any person of shares of our stock. There is no assurance that such provision will not be amended or eliminated at any time in the future.

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              The "unsolicited takeover" provisions of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses if we have a class of equity securities registered under the Exchange Act and at least three independent directors (which we will have upon the completion of this offering). These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-current market price. Our charter contains a provision whereby we have elected to be subject to a provision of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our Board of Directors.

              See "Certain Provisions of Maryland Law and of our Charter and Bylaws — Business Combinations," "Certain Provisions of Maryland Law and of our Charter and Bylaws — Control Share Acquisitions" and "Certain Provisions of Maryland Law and of our Charter and Bylaws — Subtitle 8."

    Our authorized but unissued common stock and preferred stock may prevent a change in control.

              Our charter authorizes us to issue additional authorized but unissued shares of our common stock and preferred stock. In addition, a majority of our entire Board of Directors may, without stockholder approval, approve amendments to our charter to increase the aggregate number of our authorized shares of stock or the number of shares of stock of any class or series that we have authority to issue and may classify or reclassify unissued shares of our common stock or preferred stock and may set the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms and conditions of redemption of the classified or reclassified shares. As a result, among other things, our Board of Directors may establish a class or series of shares of our common stock or preferred stock that could delay or prevent a transaction or a change in control of us that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

    Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interest.

              Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty that is established by a final judgment and is material to the cause of action. Our charter contains such a provision that eliminates such liability to the maximum extent permitted by Maryland law.

              Our charter obligates us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding without requiring a preliminary determination of the director's or officer's ultimate entitlement to indemnification to:

      any present or former director or officer who is made or threatened to be made a party to, or witness in, a proceeding by reason of his or her service in that capacity; or

      any individual who, while a director or officer of ours and at our request, serves or has served as a director, officer, partner, member, manager, trustee, employee or agent of another corporation, partnership, limited liability company, joint venture, real estate investment trust, trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to, or witness in, a proceeding by reason of his or her service in that capacity.

              As a result, we and our stockholders may have more limited rights against our present and former directors and officers than might otherwise exist absent the current provisions in our charter or that

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    might exist with other companies, which could limit your recourse in the event of actions not in your best interest.

    Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.

              Our charter provides that, subject to the rights of holders of one or more classes or series of preferred stock to elect or remove one or more directors, a director, or the entire Board of Directors, may be removed only for "cause," and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors. For this purpose, "cause" means, with respect to any particular director, conviction of a felony or a final judgment of a court of competent jurisdiction holding that such director caused demonstrable, material harm to us through bad faith or active and deliberate dishonesty. Additionally, vacancies on our Board of Directors may be filled only by the affirmative vote of a majority of the directors remaining in office, even if the remaining directors do not constitute a quorum, and, if our Board of Directors is classified, any individual elected to fill such vacancy will serve for the remainder of the full term of the directorship of the class in which the vacancy occurred and until a successor is duly elected and qualifies. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control of us that is in the best interests of our stockholders.

    Our charter contains provisions that reduce or eliminate the duties of certain of our directors and officers with respect to corporate opportunities.

              Our charter provides that, to the maximum extent permitted from time to time by Maryland law, if any of our directors or officers who is also an officer, director, employee, agent, partner, manager, member or stockholder of Angel Oak acquires knowledge of a potential business opportunity, we renounce any potential interest or expectation in, or right to be offered or to participate in, such business opportunity, unless such business opportunity is a Retained Opportunity. Accordingly, except for Retained Opportunities, to the maximum extent permitted from time to time by Maryland law and our charter, none of our directors or officers who is also an officer, director, employee, agent, partner, manager, member or stockholder of Angel Oak is required to present, communicate or offer any business opportunity to us and can hold and exploit any business opportunity, or direct, recommend, offer, sell, assign or otherwise transfer such business opportunity to any person or entity other than us.

              As a result, our directors and officers who are also officers, directors, employees, agents, partners, managers, members or stockholders of Angel Oak may compete with us for investments or other business opportunities and we and our stockholders may have more limited rights against our directors and officers than might otherwise exist, which might limit your recourse in the event of actions not in your best interest.

    The ownership limits in our charter may discourage a takeover or business combination that may have benefited our stock.

              Due to limitations on the concentration of ownership of REIT stock imposed by the Code, and subject to certain exceptions, our charter provides that no person may beneficially or constructively own (1) shares of common stock in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock or (2) shares of stock in excess of 9.8% in value of the outstanding shares of our stock. These and other restrictions on ownership and transfer of our shares contained in our charter may discourage a change in control of us and may deter individuals or entities from making tender offers for shares of our common stock on terms that might be financially attractive to you or which may cause a change in our management. In addition to deterring potential transactions that may be favorable to our stockholders, these provisions may also decrease your ability to sell shares of our common stock.

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    Our 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.

              Due to limitations on the concentration of ownership of REIT stock imposed by the Code, and subject to certain exceptions, our charter provides that no person may beneficially or constructively own (1) shares of common stock in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock or (2) shares of stock in excess of 9.8% in value of the outstanding shares of our stock. Our charter also contains certain other limitations on the ownership and transfer of our stock.

              Our charter provides that our Board of Directors, subject to certain limits, upon receipt of such representations and agreements as our Board of Directors may require, may prospectively or retroactively exempt a person from either or both of the ownership limits and establish a different limit on ownership for such person. Our Board of Directors may, in its sole and absolute discretion, increase or decrease one or both of the ownership limits for one or more persons, except that a decreased ownership limit will not be effective for any person whose actual, beneficial or constructive ownership of our stock exceeds the decreased ownership limit at the time of the decrease until the person's actual, beneficial or constructive ownership of our stock equals or falls below the decreased ownership limit, although any further direct or indirect acquisition of shares of our stock (other than by a previously-exempted person) will violate the decreased ownership limit. Our Board of Directors may not increase or decrease any ownership limit if the new ownership limit would allow five or fewer persons to actually or beneficially own more than 49.9% in value of our outstanding stock or could cause us to be "closely held" under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT.

              The constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% of our common stock (or the acquisition of an interest in an entity that owns, actually or constructively, our common stock) by an individual or entity could, nevertheless, cause that individual or entity, or another individual or entity, to own constructively in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock or 9.8% in value of our outstanding shares of stock and thereby violate the applicable ownership limit. Pursuant to our charter, if any purported transfer of our stock or any other event (1) would otherwise result in any person violating the ownership limits or such other limit established by our Board of Directors, (2) could result in us being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or (3) otherwise would cause us to fail to qualify as a REIT, then the number of shares causing the violation (rounded up to the nearest whole share) will be automatically transferred to, and held by, a trust for the exclusive benefit of one or more charitable beneficiaries selected by us. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent a violation of the applicable restriction on ownership and transfer of our stock, then the transfer of the number of shares that otherwise would cause any person to violate the above restrictions will be void and of no force or effect, regardless of any action or inaction by our Board of Directors, and the intended transferee will acquire no rights in the shares. If any transfer of our stock would result in shares of our stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code), then any such purported transfer will be void and of no force or effect and the intended transferee will acquire no rights in the shares.

    Our 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.

              Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the U.S. District

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    Court for the District of Maryland, Northern Division, will be the sole and exclusive forum for (1) any Internal Corporate Claim, as such term is defined in the MGCL, (2) any derivative action or proceeding brought on our behalf, other than actions arising under U.S. federal securities laws, (3) any action asserting a claim of breach of any duty owed by any of our directors, officers or other employees to us or to our stockholders, (4) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the MGCL or our charter or bylaws or (5) any other action asserting a claim against us or any of our directors, officers or other employees that is governed by the internal affairs doctrine. None of the foregoing actions, claims or proceedings may be brought in any court sitting outside the State of Maryland unless we consent to such court. These choice of forum provisions may limit a stockholder's ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers or employees and may discourage lawsuits against us and our directors, officers or employees.

    We are a holding company with no direct operations and rely on funds received from our operating partnership to pay liabilities.

              We are a holding company and conduct substantially all of our operations through our operating partnership. We do not have, apart from an interest in our operating partnership, any independent operations. As a result, we rely on distributions from our operating partnership to pay any distributions we might declare on shares of our common stock. We also rely on distributions from our operating partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from our operating partnership. In addition, because we are a holding company, your claims as stockholders are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our operating partnership's and its subsidiaries' liabilities and obligations have been paid in full.

    Conflicts of interest could arise in the future between the interests of our stockholders and the interests of holders of OP units, which may impede business decisions that could benefit our stockholders.

              Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any future partner thereof, on the other. Our directors and officers have duties to our company under applicable Maryland law in connection with the management of our company. At the same time, our wholly-owned subsidiary, Angel Oak Mortgage OP GP, LLC, as the general partner of our operating partnership, will have fiduciary duties and obligations to our operating partnership and its limited partners under Delaware law and the partnership agreement of our operating partnership in connection with the management of our operating partnership. The fiduciary duties and obligations of the general partner and its limited partners may come into conflict with the duties of our directors and officers to our company.

              Under the terms of the partnership agreement of our operating partnership, if there is a conflict between the interests of our stockholders on one hand and any limited partners on the other, the general partner will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or any limited partners; provided, however, that at such times as we own a controlling economic interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or any limited partners shall be resolved in favor of our stockholders.

              The partnership agreement also provides that the general partner will not be liable to our operating partnership, its partners or any other person bound by the partnership agreement for monetary damages for losses sustained, liabilities incurred or benefits not derived by our operating partnership or any limited partner, except for liability for the general partner's intentional harm or gross negligence. Moreover, the partnership agreement provides that our operating partnership is required to indemnify

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    the general partner or any affiliate of the general partner or any of their respective trustees, directors, officers, stockholders, partners, members, employees, representatives or agents, and officers, employees, representatives or agents of our operating partnership and other persons that the general partner may designate from time to time, in its sole and absolute discretion, against any and all losses, claims, damages, liabilities, joint or several, expenses (including attorneys' fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of our operating partnership, except (1) if the act or omission of the person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active or deliberate dishonesty, (2) for any loss resulting from any transaction for which the indemnified party actually received an improper personal benefit, in money, property or services or otherwise in violation or breach of any provision of the partnership agreement or (3) in the case of a criminal proceeding, if the indemnified person had reason to believe that the act or omission was unlawful.

    Risks Related to Our Common Stock and this Offering

    The initial public offering price per share of our common stock offered by this prospectus may not accurately reflect the value of your investment.

              Prior to this offering there has been no market for shares of our common stock. The initial public offering price per share of our common stock offered by this prospectus was negotiated among us and the underwriters, and therefore may not accurately reflect the value of your investment. Factors considered in determining the price of our common stock include:

      the history and prospects of residential mortgage REITs;

      prior offerings of those companies;

      our prospects for acquiring attractive investments in our target assets;

      our capital structure;

      an assessment of our officers and Angel Oak, including our Manager, and their experience in residential mortgage lending;

      general conditions of the securities markets at the time of this offering;

      estimates of our business potential; and

      other factors we and the underwriters deemed relevant.

    You will experience immediate and substantial dilution from the purchase of our common stock in this offering.

              The initial public offering price per share of our common stock is higher than the pro forma net tangible book value per share of our common stock outstanding upon the completion of this offering and our formation transactions. Accordingly, if you purchase common stock in this offering, you will experience immediate dilution of approximately $             per share of our common stock, based upon an assumed initial public offering price of $             per share (which is the mid-point of the price range indicated on the front cover page of this prospectus). This means that investors that purchase shares of our common stock in this offering will pay a price per share that exceeds the pro forma net tangible book value per share of our assets. See "Dilution."

    An increase in market interest rates may have an adverse effect on the market price of our common stock and our ability to pay distributions to our stockholders.

              One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our dividend rate as a percentage of our share price, relative to market interest rates.

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    If market interest rates increase, prospective investors may demand a higher dividend rate on shares of our common stock or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and capital market conditions can affect the market price of shares of our common stock. For instance, if interest rates rise without an increase in our dividend rate, the market price of shares of our common stock could decrease because potential investors may require a higher dividend yield on shares of our common stock as market rates on interest-bearing instruments such as bonds rise.

    We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

              We are generally required to distribute to our stockholders at least 90% of our REIT taxable income each year for us to qualify as a REIT under the Code, which requirement we intend to satisfy through regular quarterly distributions of at least 100% of our REIT taxable income in such year, subject to certain adjustments. We have not established a minimum distribution payment level and our ability to make distributions may be adversely affected by a number of factors, including the risk factors described in this prospectus. Distributions to our common stockholders, if any, will be authorized by our Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including our historical and projected results of operations, cash flows and financial condition, our financing covenants, funding or margin requirements under financing arrangements, maintenance of our REIT qualification, applicable provisions of the MGCL, the terms of any class or series of our stock, including our Series A preferred stock, and such other factors as our Board of Directors deems relevant.

              We believe that a change in any one of the following factors could adversely affect our results of operations and cash flows and impair our ability to make distributions to our stockholders:

      the profitability of the investment of the net proceeds of this offering;

      our ability to make attractive investments;

      margin calls or other expenses that reduce our cash flow;

      defaults or prepayments in our portfolio or decreases in the value of our portfolio; and

      the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

              As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect us.

              In addition, distributions that we make to our taxable U.S. stockholders out of our current or accumulated earnings and profits, and not designated as capital gain dividends or qualified dividend income, will generally be taken into account by them as ordinary dividend income and will not be eligible for the dividends received deduction for corporations. However, the Tax Cuts and Jobs Act ("TCJA") generally may allow individual stockholders to deduct from their taxable income one-fifth of the REIT dividends payable to them that are not treated as capital gains dividends or as qualified dividend income for taxable years before January 1, 2026, provided that holding period requirements are satisfied. See "Material U.S. Federal Income Tax Considerations — Taxation of Taxable U.S. Stockholders — Distributions." Additionally, distributions that we make to our non-U.S. stockholders out of our current or accumulated earnings and profits that are not effectively connected with a U.S. trade or business of the non-U.S. stockholder will generally be subject to U.S. federal withholding tax at the rate of 30%, unless reduced or eliminated by an applicable income tax treaty. See "Material U.S. Federal Income Tax Considerations — Taxation of Non-U.S. Stockholders."

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    Purchases of our common stock by Wells Fargo Securities, LLC for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market.

              Prior to the completion of this offering, we intend to enter into the 10b5-1 Purchase Plan with Wells Fargo Securities, LLC, one of the underwriters in this offering. Pursuant to the 10b5-1 Purchase Plan, Wells Fargo Securities, LLC, as our agent, will buy in the open market up to $25.0 million in shares of our common stock in the aggregate during the period beginning four full calendar weeks following the completion of this offering and ending 12 months thereafter or, if sooner, the date on which all the capital committed to the 10b5-1 Purchase Plan has been exhausted. See "Certain Relationships and Related Party Transactions" for additional details regarding the 10b5-1 Purchase Plan. Whether purchases will be made under the 10b5-1 Purchase Plan and how much will be purchased at any time is uncertain, dependent on prevailing market prices and trading volumes, all of which we cannot predict. These activities may have the effect of maintaining the market price of our common stock or slowing a decline in the market price of our common stock, and, as a result, the market price of our common stock may be higher than the price that otherwise might exist in the open market.

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

    Legislative or other actions affecting REITs could materially and adversely affect us.

              The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to the U.S. federal income tax laws, with or without retroactive application, could materially and adversely affect us. We cannot predict how changes in the tax laws might affect us or our stockholders. New legislation, regulations promulgated by the U.S. Treasury Department (the "U.S. Treasury regulations"), administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the U.S. federal income tax consequences of such qualification.

              The TCJA made substantial changes to the Code. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to "sunset" provisions, the elimination or modification of various currently allowed deductions (including additional limitations on the deductibility of business interest and substantial limitation on the deduction for state and local taxes imposed on individuals), and the preferential taxation of certain income (including REIT dividends) derived by non-corporate taxpayers from "pass-through" entities.

              In addition, the CARES Act was recently signed into law. Among other changes, the CARES Act modifies certain provisions of the TCJA. Under the TCJA, as modified by the CARES Act, net operating losses arising in taxable years beginning after December 31, 2017 can be carried forward indefinitely. In addition, for taxable years beginning after December 31, 2017, the TCJA had limited the deduction for net operating losses to 80% of current year taxable income. The CARES Act eliminates the 80% limitation for taxable years beginning before January 1, 2021. To the extent that in the future we have available net operating losses carried forward from prior tax years, such losses may reduce the amount of distributions that must be made in order to comply with the annual REIT distribution requirements.

              The effect of these and many other changes made in the TCJA, as modified by the CARES Act, is uncertain, both in terms of their direct effect on the taxation of an investment in shares of our common stock and their indirect effect on the value of our assets. Furthermore, many of the provisions of the TCJA and the CARES Act will require guidance through the issuance of U.S. Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. It is also likely that there will be technical corrections legislation proposed with respect to the TCJA and the CARES Act, the timing and effect of which cannot be predicted and may materially and adversely affect us.

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    Our 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.

              We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. As long as we meet the requirements under the Code for qualification and taxation as a REIT each year, we can deduct dividends paid to our stockholders when calculating our REIT taxable income. For us to qualify as a REIT, we must meet detailed technical requirements, including income, asset and stock ownership tests, under several Code provisions that have not been extensively interpreted by judges or administrative officers. In addition, we do not control the determination of all factual matters and circumstances that affect our ability to qualify as a REIT. New legislation, U.S. Treasury regulations, administrative interpretations or court decisions might significantly change the U.S. federal income tax laws with respect to our qualification as a REIT or the U.S. federal income tax consequences of such qualification. We believe that we have been organized and operate in conformity with the requirements for qualification as a REIT under the Code. All of our investments are held indirectly through our operating partnership. We control our operating partnership and intend to operate it in a manner consistent with the requirements for qualification as a REIT. However, we cannot guarantee that we will qualify as a REIT in any given year because:

      the rules governing REITs are highly complex;

      we do not control all factual circumstances and legal determinations by courts or regulatory bodies that affect REIT qualification; and

      our circumstances may change in the future.

              For any taxable year that we fail to qualify as a REIT, we would be subject to U.S. federal income tax at the regular corporate rate and would not be entitled to deduct dividends paid to our stockholders from our taxable income. Consequently, our net assets and distributions to our stockholders would be substantially reduced because of our increased tax liability. If we made distributions in anticipation of our qualification as a REIT, we might be required to borrow additional funds or to liquidate some of our investments in order to pay the applicable tax. If our qualification as a REIT terminates, we may not be able to elect to be treated as a REIT for four taxable years following the year during which we lost the qualification. See "Material U.S. Federal Income Tax Considerations — U.S. Federal Income Tax Considerations as a REIT — Failure to Qualify."

              An entity that qualifies as a REIT under the Code generally will not be subject to U.S. federal income tax to the extent that it distributes its net income at least annually to its stockholders. A REIT may be subject to state and local tax in states and localities in which it does business or owns property. Additionally, we may be subject to U.S. federal income tax in certain circumstances. See "Material U.S. Federal Income Tax Considerations — U.S. Federal Income Tax Considerations as a REIT — Taxation of REITs in General."

    Complying 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.

              We intend that any property the sale or disposition of which could give rise to a "prohibited transaction" tax, including the sale of mortgage loans in connection with the issuance of REMIC Certificates or the sale of REMIC Certificates themselves, will be sold through a TRS with the consequence that any gain realized in such a sale or disposition will be subject to U.S. federal income tax at the regular corporate rate. Because the sale of mortgage loans in connection with the issuance of REMIC Certificates or the sale of REMIC Certificates represents a significant portion of our business activities, we may hold a substantial amount of our assets in one or more TRSs that are subject to corporate

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    income tax on its earnings, which may reduce the cash flow generated by us and our subsidiaries in the aggregate, and our ability to make distributions to our stockholders.

              In addition, we may be required to acquire and hold Fannie Mae multi-family securities, U.S. Treasury securities or other similar assets directly, using significant leverage to do so, in order for us to satisfy the requirement that securities of one or more TRSs represent not more than 20% of the value of our gross assets on each testing date, even though we might not have acquired or held such Fannie Mae multi-family securities, U.S. Treasury securities or other similar assets in the absence of that REIT qualification requirement. Additionally, the need to satisfy such 20% value test may require dividends to be distributed by one or more TRSs to us at times when it may not be beneficial to do so. We may, in turn, distribute all or a portion of such dividends to our stockholders at times when we might not otherwise wish to declare and pay such dividends. See "Material U.S. Federal Income Tax Considerations — U.S. Federal Income Tax Considerations as a REIT — Annual Distribution Requirements." These dividends when received by non-corporate U.S. stockholders generally will be eligible for taxation at preferential qualified dividend income tax rates rather than at ordinary income rates. See "Material U.S. Federal Income Tax Considerations — Taxation of Taxable U.S. Stockholders." TRS distributions classified as dividends, however, will generally constitute qualifying income for purposes of the 95% gross income test but not qualifying income for purposes of the 75% gross income test. It is possible that we may wish to distribute a dividend from a TRS to ourselves in order to reduce the value of TRS securities below 20% of our assets, but be unable to do so without violating the requirement that 75% of our gross income in the taxable year be derived from real estate assets. Although there are other measures we can take in such circumstances in order to remain in compliance, there can be no assurance that we will be able to comply with both of these tests in all market conditions.

              Finally, we may use a TRS to conduct servicing or other activities that give rise to fees or other similar income, the receipt of which, beyond certain limits, would be inconsistent with our continued qualification as a REIT. In that event, such income less the expenses associated with the business that produced it would be subject to U.S. federal income tax at the regular corporate rate.

    REIT 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.

              In order to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax law.

              We intend to distribute our net income in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax. Our taxable income may substantially exceed our net income as determined by GAAP or differences in timing between the recognition of taxable income and the actual receipt of cash may occur, in which case we may have taxable income in excess of cash flow from our operating activities. In such event, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, in order to satisfy the distribution requirement and to avoid U.S. federal corporate income tax and the 4% nondeductible excise tax in that year, we may be required to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; (3) distribute amounts that would otherwise be invested in our target assets consistent with our strategy, capital expenditures or repayment of debt; or (4) make a taxable distribution of shares of our common stock as part of a distribution in which stockholders may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to

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    comply with the REIT distribution requirements. Thus, compliance with the REIT distribution requirements may require us to take actions that may not otherwise be advisable given existing market conditions and hinder our ability to grow, which could materially and adversely affect us.

    We may have phantom income from our acquisition and holding of subordinated RMBS and CMBS and excess MSRs.

              The tax accounting rules with respect to the timing and character of income and losses from our acquisition and holding of subordinated RMBS and CMBS may result in adverse tax consequences. We will be required to include in income accrued interest, original issue discount ("OID") and, potentially, market discount (each of which will be ordinary income), with respect to subordinated RMBS and CMBS we hold, in accordance with the accrual method of accounting. Income will be required to be accrued and reported, without giving effect to delays or reductions in distributions attributable to defaults or delinquencies on the underlying loans, except to the extent it can be established that such losses are uncollectible. Accordingly, we may incur a diminution in actual or projected cash flow in a given year as a result of an actual or anticipated default or delinquency, but may not be able to take a deduction for the corresponding loss until a subsequent tax year. While we generally may cease to accrue interest income if it reasonably appears that the interest will be uncollectible, the IRS may take the position that OID must continue to be accrued in spite of its uncollectibility until our investments in subordinated RMBS and CMBS are disposed of in a taxable transaction or become worthless.

              The foregoing risks may be particularly acute in the current circumstances with respect to the COVID-19 pandemic, in which borrowers may be unable to make timely payments of interest due on their loans, either in accordance with forbearance programs instituted by lenders or servicers or due to economic dislocations. Despite not receiving payments of interest from such borrowers, we may nevertheless be required to continue to accrue the related interest income to the extent that it may ultimately be collectible.

              In addition to the foregoing, we intend to treat excess MSRs that we acquire as ownership interests in the interest payments made on the underlying pool of mortgage loans, akin to an "interest only" stripped coupon. Under this treatment, for purposes of determining the amount and timing of taxable income, each excess MSR is treated as a bond that was issued with OID on the date we acquired such excess MSR. In general, we will be required to accrue OID based on the constant yield to maturity of each excess MSR, and to treat such OID as taxable income in accordance with the applicable U.S. federal income tax rules. The constant yield of an excess MSR will be determined, and we will be taxed based on, a prepayment assumption regarding future payments due on the mortgage loans underlying the excess MSR. If the mortgage loans underlying an excess MSR prepay at a rate different than that under the prepayment assumption, our recognition of OID will be either increased or decreased depending on the circumstances. Thus, in a particular taxable year, we may be required to accrue an amount of income in respect of an excess MSR that exceeds the amount of cash collected in respect of that excess MSR. Furthermore, it is possible that, over the life of the investment in an excess MSR, the total amount we pay for, and accrue with respect to, the excess MSR may exceed the total amount we collect on such excess MSR. No assurance can be given as to when we will be entitled to a loss or deduction for such excess and whether that loss will be a capital loss or an ordinary loss.

              Due to each of these potential differences between income recognition or expense deduction and related cash receipts or disbursements, there is a significant risk that we may have substantial taxable income in excess of cash available for distribution. In that event, we may need to borrow funds or take other actions to satisfy the REIT distribution requirements for the taxable year in which this "phantom income" is recognized.

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    We are dependent on external sources of capital to finance our growth.

              As with other REITs, but unlike corporations generally, our ability to finance our growth must largely be funded by external sources of capital because we generally have to distribute to our stockholders 90% of our REIT taxable income in order to qualify as a REIT and 100% of REIT taxable income in order to avoid U.S. federal corporate income tax and a 4% nondeductible excise tax. Our access to external capital depends upon a number of factors, including general market conditions, the market's perception of our growth potential, our current and potential future earnings, cash distributions and the market price of our common stock.

    An investment in us by non-U.S. stockholders that are neither foreign sovereigns entitled to the benefits of Section 892 of the Code nor foreign pension funds or similar entities able to claim an exemption from withholding taxes on REIT dividends under a tax treaty is not the most tax-efficient way to invest in mortgage loans and RMBS.

              In the case of non-U.S. stockholders, dividends received by non-U.S. stockholders will generally be subject to U.S. withholding tax at a 30% rate or an applicable lower treaty rate. For most non-U.S. stockholders, investment in a REIT that invests principally in mortgage loans and MBS is not the most tax-efficient way to invest in such assets. That is because receiving distributions of income derived from such assets in the form of REIT dividends subjects most non-U.S. stockholders to withholding taxes that direct investment in those asset classes, and the direct receipt of interest and principal payments with respect to them, would not. The principal exceptions are foreign sovereigns and their agencies and instrumentalities, which may be exempt from withholding taxes on REIT dividends under Section 892 of the Code, and certain foreign pension funds or similar entities able to claim an exemption from withholding taxes on REIT dividends under the terms of a bilateral tax treaty between their country of residence and the United States.

    Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt U.S. stockholders.

              If (1) all or a portion of our assets are subject to the rules relating to TMPs (as defined below), (2) we are a "pension held REIT," (3) a tax-exempt U.S. stockholder has incurred debt to purchase or hold shares of our common stock, or (4) we hold REMIC residual interests or similar interests in TMPs that generate excess inclusion income ("EII"), then a portion of the distributions to and, in the case of a stockholder described in clause (3), gains realized on the sale of common stock by such tax-exempt U.S. stockholder may be subject to U.S. federal income tax as unrelated business taxable income ("UBTI") under the Code.

    Our stockholders may be required to recognize excess inclusion income unless we do not distribute such income and pay corporate income tax on it.

              We may engage in securitization transactions that result in our holding one or more REMIC "residual interests" that give rise to EII.

              We may also issue bonds secured directly or indirectly by mortgage loans ("Securitized Bonds") to investors in a "time-tranched," sequential pay format, in a taxable mortgage pool ("TMP") structure economically similar to sequential pay RMBS and CMBS issued in REMIC securitization transactions. In the case of the issuance of Securitized Bonds, we will be required to hold an interest in such securitizations that is equivalent to a residual interest in a REMIC. Under special rules applicable to REITs that own a TMP, a portion of our income will be treated as if it were EII derived from a REMIC residual interest.

              If EII is not distributed, it will be subject to corporate income tax at the REIT level. If EII is distributed by us, a stockholder's share of such EII (1) cannot be offset by any net operating losses

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    otherwise available to such stockholder, (2) is generally subject to tax as UBTI in the hands of stockholders that are otherwise generally exempt from U.S. federal income tax but are subject to UBTI taxation, and (3) results in the application of U.S. federal income tax withholding at the maximum rate, without reduction under any otherwise applicable income tax treaty or other exemption, to the extent distributed to non-U.S. stockholders that are not agencies or instrumentalities of a foreign government. To the extent that EII is allocable to tax-exempt stockholders that are not subject to UBTI (such as domestic or foreign government entities or public pension funds), we would incur a corporate-level tax on such income, and, in that case, we may reduce the amount of distributions to those stockholders that gave rise to the tax.

              While we do not intend to distribute EII to our stockholders, and instead to hold any REMIC residual interests that give rise to EII through a TRS and to retain, and to pay corporate income tax on, EII from TMPs, there can be no assurance that we will be able to do so in all situations and that our stockholders will not receive distributions of EII. See "Material U.S. Federal Income Tax Considerations — U.S. Federal Income Tax Considerations as a REIT — REMIC Residual Interests, Taxable Mortgage Pools and Excess Inclusion Income" below.

    Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities.

              In order to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes, we must on a continuing basis satisfy various tests on an annual and quarterly basis regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. To meet these tests, we may be required to forgo investments we might otherwise make. We may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our investment performance and materially and adversely affect us.

    Complying with REIT requirements may force us to liquidate otherwise profitable assets, which could materially and adversely affect us.

              In order to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and designated real estate assets, including certain mortgage loans and stock in other REITs. Subject to certain exceptions, our ownership of securities, other than government securities and securities that constitute real estate assets, generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets, other than government securities and securities that constitute real estate assets, can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more TRSs. We generally do not intend, and as the sole owner of the general partner of our operating partnership, do not intend to permit our operating partnership, to take actions we believe would cause us to fail to satisfy the asset tests described above. However, if we fail to comply with these requirements at the end of any calendar quarter after the first calendar quarter for which we qualified as a REIT, we must generally correct such failure within 30 days after the end of such calendar quarter to prevent us from losing our REIT qualification. As a result, we may be required to liquidate otherwise profitable assets prematurely, which could reduce the return on our assets, which could materially and adversely affect us.

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    We 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.

              We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of the distribution as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay U.S. federal income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells shares of our common stock that it receives as a dividend in order to pay this tax, the sale proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of shares of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of shares of our common stock.

    The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

              We have entered into financing arrangements that are structured as sale and repurchase agreements pursuant to which we would nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in exchange for a purchase price. Economically, these agreements are financings which are secured by the assets sold pursuant thereto. We believe that we would be treated for REIT asset and income test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT.

    Even though we have elected, and intend to qualify to be taxed, as a REIT, we may be required to pay certain taxes.

              Even though we have elected, and intend to qualify to be taxed, as a REIT for U.S. federal income tax purposes, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, prohibited transactions, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. See "Material U.S. Federal Income Tax Considerations — U.S. Federal Income Tax Considerations as a REIT — Taxation of REITs in General." In addition, we may hold some of our assets through wholly-owned TRSs. Our TRSs and any other taxable corporations in which we own an interest will be subject to U.S. federal, state and local corporate taxes. Payment of these taxes generally would reduce our cash flow and the amount available to distribute to our stockholders, which could materially and adversely affect us.

    Complying with REIT requirements may limit our ability to hedge effectively.

              The REIT provisions of the Code limit the ability of a REIT to hedge its liabilities. Generally, income from a hedging transaction a REIT enters into either to reduce its exposure to interest rate and currency fluctuations, tenant credit deterioration and/or declines in the public market price of such investment or other related risks that constitutes "qualifying income" for purposes of the 75% or 95% gross income tests applicable to REITs, does not constitute "gross income" for purposes of the 75% or 95% gross income tests, provided that the REIT properly identifies the hedging transaction pursuant to the applicable sections of the Code and U.S. Treasury regulations. To the extent that a REIT enters into other types of hedging transactions, the income from those transactions is likely to be treated as

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    non-qualifying income for purposes of both gross income tests. As a result of these rules, we may need to limit our use of otherwise advantageous hedging techniques or implement those hedges through a TRS. The use of a TRS could increase the cost of our hedging activities (because the TRS would be subject to tax on income or gain resulting from hedges entered into by it) or expose ourselves to greater risks associated with interest rate or other changes than we would otherwise incur.

    We may be subject to state and local tax risks, which could materially and adversely affect us.

              If we were to establish taxability in any state or local jurisdiction, each stockholder would generally be deemed to have established taxability in that state or local jurisdiction by virtue of his, her or its ownership of shares of our common stock. The state and/or local tax owed by the stockholder may be determined based on a multitude of factors, potentially including our net or gross income, properly reportable U.S. federal taxable income, or some other measure, such as capital or gross receipts. A prospective stockholder should be aware that state and/or local taxes could potentially have a material adverse effect on the amount available for distributions by us due to our actual state and/or local tax payment obligations and/or the establishment of reserves for state and/or local taxes that we may potentially be owing, which could materially and adversely affect us.

    General Risk Factors

    The obligations associated with being a public company will require significant resources and attention from our Manager's senior management team.

              As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, including the requirements of the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and requirements of the NYSE, with which we were not required to comply as a private company. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls over financial reporting. While Section 404 of the Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control structure and procedures for financial reporting on an annual basis, for as long as we are an 'emerging growth company' under the JOBS Act (which we may be until the last day of the fiscal year following the fifth anniversary of this offering), the registered public accounting firm that issues an audit report on our financial statements will not be required to attest to or report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. An independent assessment of the effectiveness of our internal controls could detect problems that our management's assessment might not. See "—We are an 'emerging growth company,' and we cannot be certain if the reduced SEC reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors, which could make the market price and trading volume of shares of our common stock be more volatile and decline significantly."

              Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in implementing or maintaining an effective system of internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require our Manager to devote significant time and us to incur significant expense to remediate any such material weaknesses or significant deficiencies and our Manager may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to

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    fail to meet our reporting obligations and cause stockholders to lose confidence in our financial results, which could materially and adversely affect us.

              As a public company with listed equity securities, we will also be required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with, or submit to, the SEC is recorded, processed, summarized and reported, within the time periods specified by the SEC. They include controls and procedures designed to ensure that information required to be disclosed in reports filed with, or submitted to, the SEC is accumulated and communicated to management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Designing and implementing effective disclosure controls and procedures is a continuous effort that requires significant resources and devotion of time. We may discover deficiencies in our disclosure controls and procedures that may be difficult or time consuming to remediate in a timely manner.

              These reporting and other obligations will place significant demands on us and our Manager's senior management team, administrative, operational and accounting resources and will cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and other controls, reporting systems and procedures, and create or outsource an internal audit function. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to public companies could be impaired.

    We are an "emerging growth company," and we cannot be certain if the reduced SEC reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors, which could make the market price and trading volume of shares of our common stock more volatile and decline significantly.

              We are an "emerging growth company" as defined in the JOBS Act. We will remain an "emerging growth company" until the earliest to occur of (1) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to adjustment for inflation), (2) the last day of the fiscal year following the fifth anniversary of this offering, (3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities or (4) the date on which we are deemed to be a "large accelerated filer" under the Exchange Act. We intend to take advantage of exemptions from various reporting requirements that are applicable to most other public companies, whether or not they are classified as "emerging growth companies," including, but not limited to, an exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved. An attestation report by our auditor would require additional procedures by them that could detect problems with our internal control over financial reporting that are not detected by management. If our system of internal control over financial reporting is not determined to be appropriately designed or operating effectively, it could require us to restate financial statements, cause us to fail to meet reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a significant decline in the market price of shares of our common stock.

              Additionally, as an "emerging growth company," we are permitted to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, which would allow us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to "opt out" of this extended transition period and, as a result, we will comply with new or revised accounting standards on or prior to the relevant dates on which adoption of such standards is required

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    for all public companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

              We cannot predict if investors will find shares of our common stock less attractive because we intend to rely on certain of these exemptions and benefits under the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active, liquid and/or orderly trading market for shares of our common stock and the market price and trading volume of shares of our common stock may be more volatile and could decline significantly.

    There is currently no public market for shares of our common stock, a trading market for shares of our common stock may never develop following this offering and our common stock price may be volatile and could decline substantially following this offering.

              Shares of our common stock are newly-issued securities for which there is no established trading market. We intend to apply to have our common stock listed on the NYSE, but there can be no assurance that an active trading market for shares of our common stock will develop. Accordingly, no assurance can be given as to the ability of our stockholders to sell their shares or the price that our stockholders may obtain for their shares of our common stock.

              If an active market does not develop or is not maintained, the market price of shares of our common stock may decline and you may not be able to sell shares of our common stock. Even if an active trading market develops for shares of our common stock subsequent to this offering, the market price of shares of our common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates, market conditions in general or other factors not currently known to us could have a significant impact on the future market price of shares of our common stock. Some of the factors that could negatively affect the price of shares of our common stock or result in fluctuations in the price of shares of our common stock include:

      actual or anticipated variations in our quarterly operating results, financial condition, cash flows and liquidity, or changes in business strategy or prospects;

      conflicts of interest in our relationship with Angel Oak, including our Manager, including our officers and directors;

      equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur, including issuances of shares of our common stock upon the redemption of OP units;

      loss of a major funding source;

      actual or anticipated accounting problems;

      publication of research reports about us or the real estate industry;

      increases in market interest rates that lead purchasers of shares of our common stock to demand a higher yield;

      changes in market valuations of similar companies;

      adverse market reaction to any increased indebtedness we incur in the future;

      additions or departures of our Manager's key personnel;

      actions by stockholders;

      speculation in the press or investment community;

      a compression of the yield on our investments and an increase in the cost of our liabilities;

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      failure to maintain our qualification as a REIT or exclusion from regulation as an investment company under the Investment Company Act;

      price and volume fluctuations in the overall stock market from time to time;

      general market, economic and political conditions and trends, including inflationary concerns and the current state of the credit and capital markets;

      our operating performance and the performance of other similar companies;

      changes in the value of our portfolio;

      short-selling pressure with respect to shares of our common stock or REITs generally;

      changes in accounting principles; and

      changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to REITs, and other regulatory developments that adversely affect us or our industry.

    Future 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 your shares.

              We are offering             shares of our common stock as described in this prospectus (excluding the underwriters' over-allotment option). In addition, we expect to grant an aggregate of             shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan. Additionally, in connection with our formation transactions, we will declare a stock dividend that will result in the issuance of             shares of our common stock to Angel Oak Mortgage Fund, as our sole common stockholder prior to this offering (based on the mid-point of the price range indicated on the front cover page of this prospectus), and Angel Oak Mortgage Fund will distribute the             shares of our common stock that it receives from us pursuant to the stock dividend to its partners pursuant to the terms of the limited partnership agreement of Angel Oak Mortgage Fund.

              We, our directors (other than any of our directors who are affiliated with Angel Oak), our director nominees and our fund investors have agreed for a period of 180 days after the date of this prospectus and each of our executive officers, any of our directors affiliated with Angel Oak, and our Manager and certain of its officers has agreed for a period of 365 days after the date of this prospectus not to sell or otherwise transfer, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock owned by them at the completion of this offering and our formation transactions or thereafter acquired by them, subject to specified exceptions, without the prior written consent of the representatives of the underwriters. See "Underwriting." These lock-up provisions, at any time and without notice, may be released. If the restrictions under the lock-up agreements are waived, the shares of our common stock may become available for resale into the market, subject to applicable law, which could reduce the market price for shares of our common stock.

              Upon the completion of this offering and our formation transactions, we will enter into a registration rights agreement with the partners of Angel Oak Mortgage Fund receiving shares of our common stock pursuant to Angel Oak Mortgage Fund's distribution of shares of our common stock following a stock dividend to Angel Oak Mortgage Fund, as described above. We will also enter into a registration rights agreement with respect to any equity-based awards that we may grant to our Manager in the future under our 2021 Equity Incentive Plan. In addition, we intend to file a registration statement on Form S-8 to register the issuance of the total number of shares of our common stock that may be issued under our 2021 Equity Incentive Plan, other than to our Manager, including the initial grant of           shares of restricted stock to our directors, director nominees and executive officers, as described above. See "Shares Eligible for Future Sale — Registration Rights" and "Shares Eligible for Future Sale — 2021

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    Equity Incentive Plan." Subject to the lock-up agreements with the underwriters described above, registration of these shares under the Securities Act would result in these shares becoming freely tradable without restrictions under the Securities Act immediately upon effectiveness of the registration statement.

              Sales of substantial amounts of shares of our common stock (including shares of our common stock issued upon the exchange of OP units) could cause the market price of shares of our common stock to decrease significantly. We cannot predict the effect, if any, of future sales of shares of our common stock, or the availability of shares of our common stock for future sales, on the value of shares of our common stock. Sales of substantial amounts of shares of our common stock, or the perception that such sales could occur, may adversely affect prevailing market prices for shares of our common stock.

    Future offerings of debt securities, which would rank senior to shares of our common stock upon our bankruptcy or liquidation, and future offerings of equity securities which would dilute the common stock holdings of our existing stockholders and may be senior to shares of our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of shares of our common stock.

              In the future, we may attempt to increase our capital resources by making offerings of debt securities (or causing our operating partnership to issue debt securities) or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities, our Series A preferred stock and other preferred stock, if issued, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of shares of our common stock. Our Series A preferred stock does, and additional preferred stock could, have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to pay a dividend or other distribution to the holders of shares of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of shares of our common stock bear the risk of our future offerings reducing the market price of shares of our common stock and diluting their stock holdings in us.

    If securities analysts do not publish research or reports about our business or if they downgrade our stock or our core market, our stock price and trading volume could decline.

              The trading market for shares of our common stock may rely in part on the research and reports that industry or financial analysts publish about us or our business or industry. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business or industry, the price of our stock could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

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    SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

              This prospectus contains certain forward-looking statements that are subject to various risks and uncertainties, including, without limitation, statements relating to the performance of our investments and our financing needs and arrangements. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "believe," "could," "project," "predict," "continue" or by the negative of these words and phrases or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe existing or future plans and strategies, contain projections of results of operations, liquidity and/or financial condition or state other forward-looking information. Our ability to predict future events or conditions or their impact or the actual effect of existing or future plans or strategies is inherently uncertain, in particular due to the uncertainties created by the COVID-19 pandemic, including the projected impact of the COVID-19 pandemic on our business, financial results and performance. Although we believe that such forward-looking statements are based on reasonable assumptions, actual results and performance in the future could differ materially from those set forth in or implied by such forward-looking statements. Factors that could have a material adverse effect on future results and performance relative to those set forth in or implied by the related forward-looking statements, as well as on our business, financial condition, liquidity, results of operations and prospects, include, but are not limited to:

      the factors referenced in this prospectus, including those set forth under the sections captioned "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations;"

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

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

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

      changes in our industry, interest rates, the debt or equity markets, the general economy (or in specific regions) or the residential real estate finance and the real estate markets specifically, including changes resulting from the COVID-19 pandemic;

      changes in our business strategies or target assets;

      general volatility of the markets in which we invest;

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

      the ability of our Manager to locate suitable investments for us, manage our portfolio and implement our strategy;

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

      the adequacy of collateral securing our investments and a decline in the fair value of our investments;

      the timing of cash flows, if any, from our investments;

      our ability to profitably execute securitization transactions;

      the operating performance, liquidity and financial condition of borrowers;

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      increased rates of default and/or decreased recovery rates on our investments;

      changes in prepayment rates on our investments;

      the departure of any of the members of senior management of our Manager from our Manager or Angel Oak;

      the availability of qualified personnel;

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

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

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

      the level of governmental involvement in the U.S. mortgage market;

      future changes with respect to the GSEs and related events, including the lack of certainty as to the future roles of these entities and the U.S. Government in the mortgage market and changes to legislation and regulations affecting these entities;

      effects of hedging instruments on our target assets and our returns, and the degree to which our hedging strategies may or may not protect us from interest rate volatility;

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

      our ability to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes; and

      our ability to maintain our exclusion from regulation as an investment company under the Investment Company Act.

              When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management's views only as of the date of this prospectus. The risks summarized under "Risk Factors" and elsewhere in this prospectus could cause actual results and performance to differ materially from those set forth in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us.

              Except as required by applicable law, we assume no obligation, and do not intend to, update or otherwise revise any of our forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

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    USE OF PROCEEDS

              We estimate that the net proceeds we will receive from this offering will be approximately $              million (or approximately $              million if the underwriters exercise their over-allotment in full), assuming an initial public offering price of $             per share, which is the mid-point of the price range indicated on the front cover page of this prospectus, excluding the underwriting discounts and commissions and offering expenses, each of which Angel Oak Capital has agreed to pay. See "Underwriting."

              Upon the completion of this offering and our formation transactions, we will contribute the net proceeds of this offering to our operating partnership in exchange for OP units. Our operating partnership intends to deploy the net proceeds received from us to acquire non-QM loans and other target assets primarily sourced from Angel Oak Mortgage Lending or other target assets through the secondary market in a manner consistent with our strategy and investment guidelines described in this prospectus, and for general corporate purposes. The allocation of our capital among our target assets will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments.

              Until appropriate investments can be identified, we intend to invest the net proceeds of this offering in readily marketable, interest-bearing, short-term investment grade securities or money market accounts that are consistent with our intention to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes and maintain our exclusion from regulation as an investment company under the Investment Company Act. Such temporary investments are expected to provide a lower net return than we anticipate achieving from non-QM loans and other target assets.

              Although we do not intend to use any of the net proceeds of this offering to fund distributions to our stockholders, to the extent we use these net proceeds to fund distributions, these payments may be treated as a return of capital to our stockholders.

              Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by approximately $              million, assuming the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and excluding the underwriting discounts and commissions and offering expenses, each of which Angel Oak Capital has agreed to pay.

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    DILUTION

              Purchasers of our common stock offered by this prospectus will experience an immediate and substantial dilution of the net tangible book value per share of our common stock from the initial public offering price per share. Net tangible book value per share represents the amount of total tangible assets less total tangible liabilities, divided by the number of outstanding shares of our common stock. As of December 31, 2020, we had a net tangible book value, pro forma for our formation transactions, of approximately $              million, or $             per share. After taking into account the completion of this offering, our pro forma net tangible book value as of December 31, 2020 would have been $              million, or $             per share (in each case, assuming an initial public offering price of $             per share, which is the mid-point of the price range indicated on the front cover page of this prospectus, and no exercise by the underwriters of their over-allotment option). This amount represents an immediate increase in net tangible book value of $             per share to our fund investors and an immediate dilution in pro forma net tangible book value of $             per share from the initial public offering price of $             per share to our new investors. The following table illustrates this per share dilution.

    Initial public offering price per share

                $          

    Net tangible book value per share as of December 31, 2020, pro forma for our formation transactions(1)

     $                     

    Net increase in net tangible book value per share attributable to investors in this offering

                           

    Pro forma net tangible book value per share after this offering and our formation transactions(2)

                           

    Dilution in pro forma net tangible book value per share to new investors(3)

                $          

    (1)
    Reflects (a) the issuance of an aggregate of                 shares of our common stock in a stock dividend to Angel Oak Mortgage Fund, as our sole common stockholder prior to this offering, and (b) the grant of an aggregate of                 shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan.

    (2)
    The pro forma net tangible book value per share after this offering and our formation transactions, including the issuance of                 shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend and the expected grant of                 shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan, was determined by dividing net tangible book value of approximately $              million by              shares of our common stock to be outstanding after this offering and our formation transactions. This excludes (a) up to an additional             shares of our common stock that we may issue and sell upon the exercise of the underwriters' over-allotment option and (b) up to             shares of our common stock reserved for issuance under our 2021 Equity Incentive Plan.

    (3)
    The dilution in pro forma net tangible book value per share to new investors was determined by subtracting pro forma net tangible book value per share after this offering and our formation transactions, including the issuance of             shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend and the expected grant of              shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan, from the assumed initial public offering price per share paid by a new investor for our common stock.

              The following table summarizes, as of December 31, 2020, after taking into account the completion of this offering and our formation transactions, including the issuance of              shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend and the expected grant of             shares

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    of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan, the total number of shares of our common stock purchased from or issued by us, the total consideration paid to us and the average price per share of our common stock paid by our fund investors and by new investors purchasing shares of our common stock in this offering.

     
     Common Stock
    Purchased or Issued
      
      
      
     
     
     Total Consideration  
     
     
     Average
    Price Per
    Share
     
    ($ in thousands, except per share data)
     Number Percentage Amount Percentage 

    Fund investors(1)

                       %$                 %$            

    New investors(2)

                                                 $            

    Total

                   100%$             100%$            

    (1)
    Includes the issuance of             shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend.

    (2)
    Includes (a)              shares of our common stock to be sold in this offering and (b) the expected grant of             shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan.

              A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the total consideration paid by the investors in this offering by $              million, and would increase (decrease) the percent of total consideration paid by the investors by approximately         %, assuming that the number of shares of our common stock offered by us, as set forth on the front cover page of this prospectus, remains the same and no exercise of the underwriters' over-allotment option.

              If the underwriters' over-allotment option to purchase additional shares is exercised in full, the following will occur:

      the number of shares of our common stock purchased by investors in this offering will increase to             shares of our common stock, or approximately         % of the total number of shares of our common stock outstanding;

      the immediate dilution experienced by investors in this offering will be $             per share and the pro forma net tangible book value per share will be $             per share; and

      a $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the dilution experienced by investors in this offering by $             per share.

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    DISTRIBUTION POLICY

              Following the completion of this offering, we intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at the regular corporate rate to the extent that it annually distributes less than 100% of its REIT taxable income. As a result, in order to satisfy the requirements for us to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of at least 100% of our REIT taxable income to holders of our common stock out of assets legally available therefor.

              Distributions to our common stockholders, if any, will be authorized by our Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including our historical and projected results of operations, cash flows and financial condition, our financing covenants, funding or margin requirements under financing arrangements, maintenance of our REIT qualification, applicable provisions of the MGCL, the terms of any class or series of our stock, including our Series A preferred stock, and such other factors as our Board of Directors deems relevant. Our results of operations, liquidity and financial condition and our ability to pay distributions will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. We may not be able to make any distributions to our stockholders. For more information regarding risk factors that could materially and adversely affect our earnings and financial condition, see "Risk Factors."

              To the extent that in respect of any calendar year cash available for distribution is less than our cash flows from operating activities, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured. In addition, we may choose to make a portion of a required distribution in the form of a taxable stock dividend to preserve our cash balance.

              Currently, we have no intention to use any of the net proceeds of this offering to make distributions to holders of our common stock or to make distributions to holders of our common stock using shares of our common stock. For additional details, see "Use of Proceeds."

              We anticipate that distributions to our taxable U.S. stockholders out of our current or accumulated earnings and profits, and not designated as capital gain dividends or qualified dividend income, will generally be taken into account by them as ordinary dividend income and will not be eligible for the dividends received deduction for corporations. However, the TCJA generally may allow individual stockholders to deduct from their taxable income one-fifth of the REIT dividends payable to them that are not treated as capital gains dividends or as qualified dividend income for taxable years before January 1, 2026, provided that holding period requirements are satisfied. See "Material U.S. Federal Income Tax Considerations — Taxation of Taxable U.S. Stockholders — Distributions." Additionally, distributions that we make to our non-U.S. stockholders out of our current or accumulated earnings and profits that are not effectively connected with a U.S. trade or business of the non-U.S. stockholder will generally be subject to U.S. federal withholding tax at the rate of 30%, unless reduced or eliminated by an applicable income tax treaty. See "Material U.S. Federal Income Tax Considerations — Taxation of Non-U.S. Stockholders."

              Our current financing arrangements contain, and our future financing arrangements will contain, covenants (financial and otherwise) affecting our ability, and, in certain cases, our subsidiaries' ability, to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our stockholders and otherwise affect our operating policies.

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    CAPITALIZATION

              The following table sets forth (1) our actual capitalization as of December 31, 2020 and (2) our capitalization as adjusted to reflect the effects of (a) the sale of               shares of our common stock in this offering, assuming an initial public offering price of $             per share, which is the mid-point of the price range indicated on the front cover page of this prospectus, excluding the underwriting discounts and commissions and offering expenses, each of which Angel Oak Capital has agreed to pay, and (b) our formation transactions, including the issuance of               shares of our common stock by us to Angel Oak Mortgage Fund as a stock dividend and the expected grant of               shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan.

              The information below is illustrative only, and our capitalization upon the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with the information contained in "Use of Proceeds," "Selected Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as our audited consolidated financial statements and the notes thereto included elsewhere in this prospectus.

     
     As of December 31, 2020 
     
     Actual As Adjusted(1) 
     
     (in thousands, except share amounts)
     

    Debt:

           

    Notes payable

     $81,905 $  

    Securities sold under agreements to repurchase

      178,291    

    Total debt

     $260,196 $  

    Stockholders' Equity:

           

    Common stock, $0.01 par value per share; 90,000,000 shares authorized and 1,000 shares outstanding, actual; 350,000,000 shares authorized and             shares outstanding, as adjusted(2)

     $ $  

    Preferred stock, $0.01 par value per share; 10,000,000 shares authorized and 125 shares outstanding, actual; 100,000,000 shares authorized and 125 shares outstanding, as adjusted

      101    

    Additional paid in capital(2)

      246,646    

    Accumulated other comprehensive income (loss)

      (1,039)   

    Retained earnings (deficit)

      2,601    

    Total stockholders' equity(2)

     $248,309 $          

    Total capitalization

     $508,505 $  

    (1)
    Excludes (a) up to an additional               shares that we may issue and sell upon the exercise of the underwriters' over-allotment option and (b) up to               shares of our common stock reserved for issuance under our 2021 Equity Incentive Plan.

    (2)
    Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) additional paid in capital and total stockholders' equity by approximately $              million, assuming the number of shares of our common stock offered by us, as set forth on the front cover page of this prospectus, remains the same and excluding the underwriting discounts and commissions and offering expenses, each of which Angel Oak Capital has agreed to pay. The information discussed in this footnote is illustrative only.

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    SELECTED FINANCIAL INFORMATION

              You should read the following selected financial information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our unaudited and audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. The selected consolidated income statement information for the years ended December 31, 2020 and 2019 and the selected consolidated balance sheet information as of December 31, 2020 and 2019 have been derived from our audited consolidated financial statements, included elsewhere in this prospectus.

              Additionally, our results of operations presented herein do not reflect the expenses typically associated with being a public company, including the payment of increased directors' fees for our independent directors and the expenses incurred in complying with the reporting and other requirements of the Exchange Act, the payment of a base management fee and an incentive fee to our Manager as a result of differences in the way fees and expense reimbursements are calculated under the management agreement as compared to the pre-IPO management agreement, equity compensation expense and increased legal and accounting fees. Additionally, pursuant to the management agreement, we will be required to reimburse our Manager for its operating expenses, including third-party expenses, incurred on our behalf and our Manager will also be entitled to reimbursement for costs of the wages, salaries and benefits incurred by our Manager for our dedicated Chief Financial Officer and Treasurer and a pro rata portion of the costs of the wages, salaries and benefits incurred by our Manager with respect to a partially dedicated employee based on the percentage of such person's working time spent on matters related to us. Our results of operations subsequent to this offering will reflect these expenses. Moreover, prior to the completion of this offering, we have avoided registration under the Investment Company Act, among other things, on the basis that all of our holders are "qualified purchasers," as defined under the Investment Company Act. Subsequent to the completion of this offering, this will no longer be the case and we will have to conduct our business and comprise our portfolio of assets in a manner that enables us to avoid such registration. See "Risk Factors — Risks Related to Our Company — Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations." Additionally, the COVID-19 pandemic is expected to continue to adversely affect us. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — COVID-19 Impact." Accordingly, our results of operations

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    presented herein are not indicative of the results of operations that we expect to realize subsequent to this offering.

    (dollars in thousands, except share and per share data)
     Year Ended
    December 31,
    2020
     Year Ended
    December 31,
    2019
     

    OPERATING DATA:

           

    Interest income, net

           

    Interest income

     $40,820 $19,719 

    Interest expense

      7,499  7,944 

    Net interest income

     $33,321 $11,775 

    Realized and unrealized gains (losses), net

           

    Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans

      (20,793) (854)

    Net unrealized gain (loss) on derivative contracts and mortgage loans

      (2,144) 876 

    Total realized and unrealized gains (losses), net

     $(22,937)$22 

    Expenses

           

    Operating and investment expenses

     $2,036 $1,928 

    Operating expenses incurred with affiliate

      1,742  1,410 

    Securitization costs

      2,527  2,426 

    Management fee incurred with affiliate

      3,343  890 

    Total operating expenses

     $9,648 $6,654 

    Net income

     $736 $5,143 

    Preferred dividends

      (15) (14)

    Net income allocable to common stockholder

     $721 $5,129 

    Per Share Information:

           

    Net income allocable to common stockholder per share of our common stock, basic and diluted

     $721 $5,129 

    Pro forma for shares issued in our formation transactions(1)

     $  $  

    Dividends declared per share of our common stock

     $ $ 

    Pro forma for shares issued in our formation transactions(1)

     $  $  

    Weighted average number of shares of our common stock outstanding, basic and diluted

      1,000  1,000 

    Pro forma for shares issued in our formation transactions(1)

           

    Selected Other Data:

           

    Core Earnings(2)

     $2,880 $4,242 

    Core Earnings per share of our common stock, basic and diluted

     $2,880 $4,242 

    Pro forma for shares issued in our formation transactions(1)

     $  $  

    Return on average equity(3)

      0.3% 8.8%

    Core return on average equity(2)

      1.7% 7.4%

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    (dollars in thousands, except share and per share data)
     December 31,
    2020
     December 31,
    2019
     

    BALANCE SHEET DATA:

           

    Total assets

     $509,656 $459,090 

    Total liabilities

     $261,347 $364,227 

    Total stockholders' equity

     $248,309 $94,863 

    Preferred stock

     $101 $101 

    Total stockholder's equity, net of preferred stock

     $248,208 $94,762 

    Number of shares outstanding at period end

      1,000  1,000 

    Pro forma for shares issued in our formation transactions(1)

           

    Book value per share

     $248,208 $94,762 

    Pro forma for shares issued in our formation transactions(1)

     $  $  

    Ratio Data:

           

    Total debt to total stockholders' equity

      1.05x  3.82x 

    (1)
    Reflects (a) the issuance of an aggregate of               shares of our common stock in a stock dividend to Angel Oak Mortgage Fund, as our sole common stockholder prior to this offering, and (b) the grant of an aggregate of               shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan.

    (2)
    Core Earnings is a non-GAAP measure and is defined as net income (loss) allocable to common stockholders, calculated in accordance with GAAP, excluding (a) unrealized gains on our aggregate portfolio, (b) impairment losses, (c) extinguishment of debt, (d) non-cash equity compensation expense, (e) the incentive fee earned by our Manager, (f) realized gains or losses on swap terminations and (g) certain other non-recurring gains or losses determined after discussions between our Manager and our independent directors and approval by a majority of our independent directors. As defined, Core Earnings include interest income and expense as well as realized losses on interest rate futures or swaps used to hedge interest rate risk and other expenses. We believe that the presentation of Core Earnings provides investors with a useful measure to facilitate comparisons of financial performance between our REIT peers, but has important limitations. We believe Core Earnings as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, Core Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Core Earnings may not be comparable to similar measures presented by other REITs.

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      The following table provides a reconciliation of net income allocable to common stockholder, calculated in accordance with GAAP, to Core Earnings:

    (dollars in thousands, except share and per share data)
     Year Ended
    December 31,
    2020
     Year Ended December 31,
    2019
     

    Net income allocable to common stockholder

     $721 $5,129 

    Adjustments:

           

    Net other-than-temporary credit impairment losses

         

    Net unrealized (gains) losses on derivatives

      257  (937)

    Net unrealized (gains) losses on residential loans

      1,371  54 

    Net unrealized (gains) losses on commercial real estate loans

      517   

    Net unrealized (gains) losses on financial instruments at fair value

      14  (4)

    (Gains) losses on extinguishment of debt

         

    Non-cash equity compensation expense

         

    Incentive fee earned by our Manager

         

    Realized (gains) losses on terminations of interest rate swaps

         

    Total other (gains) losses

         

    Core Earnings

     $2,880 $4,242 

    Weighted average number of shares of our common stock outstanding, basic and diluted

      1,000  1,000 

    Pro forma for shares issued in our formation transactions(A)

           

    Core Earnings per share of our common stock, basic and diluted

     $2,880 $4,242 

    Pro forma for shares issued in our formation transactions(A)

     $  $  

    (A)
    Reflects (i) the issuance of an aggregate of               shares of our common stock in a stock dividend to Angel Oak Mortgage Fund, as our sole common stockholder prior to this offering, and (ii) the grant of an aggregate of               shares of restricted stock to our directors, director nominees and executive officers in connection with this offering pursuant to our 2021 Equity Incentive Plan.

        Core return on average equity is a non-GAAP measure and is defined as annual or annualized Core Earnings divided by average total stockholders' equity. We believe that the presentation of core return on average equity provides investors with a useful measure to facilitate comparisons of financial performance between our REIT peers, but has important limitations. Additionally, we believe core return on average equity provides investors with additional detail on the Core Earnings generated by our invested equity capital. We believe core return on average equity as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, core return on average equity should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating core 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 core return on

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        average equity may not be comparable to similar measures presented by other REITs. Set forth below is our computation of core return on average equity for the periods presented:

    (dollars in thousands)
     Year Ended
    December 31, 2020
     Year Ended
    December 31, 2019
     

    Core Earnings

     $2,880 $4,242 

    Average total stockholders' equity

     $171,586 $57,682 

    Core return on average equity

      1.7% 7.4%
    (3)
    Our return on average equity was calculated by dividing net income by average stockholders' equity.

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    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

              The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this prospectus. In addition, where specified, the following discussion and analysis includes analysis of the effects of this offering and our formation transactions. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our business strategies, our expectations regarding the future performance of our business and the other non-historical statements contained herein, are forward-looking statements. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth under "Risk Factors," including risks relating to the outbreak and impact of COVID-19 on the U.S. and global economies and our business, and "Special Note Regarding Forward-Looking Statements."

    Our Company

              Angel Oak Mortgage, Inc. is a real estate finance company focused on acquiring and investing in first lien non-QM loans and other mortgage-related assets in the U.S. mortgage market. Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending, which operates through wholesale and retail channels and has a national origination footprint. We also may invest in other residential mortgage loans, RMBS and other mortgage-related assets, which, together with non-QM loans, we refer to in this prospectus as our target assets. Further, we also may identify and acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases. Our objective is to generate attractive risk-adjusted returns for our stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles.

              We commenced operations in September 2018 and are organized as a Maryland corporation. On February 5, 2020, we formed our operating partnership through which substantially all of our assets are held and substantially all of our operations are conducted, either directly or through subsidiaries. Prior to the completion of this offering and our formation transactions, all of our common stock is owned by Angel Oak Mortgage Fund, a private investment fund formed in February 2018 with an aggregate of $303 million in equity capital commitments since commencement of operations, including an aggregate of $1.0 million in equity capital commitments made by Sreeniwas Prabhu, Managing Partner and Co-Chief Executive Officer of Angel Oak Capital and the President of our Manager, and Michael Fierman, the Chairman of our Board of Directors and a Managing Partner and Co-Chief Executive Officer of Angel Oak Companies. Prior to the completion of this offering and our formation transactions, our Manager serves as the general partner and investment manager of Angel Oak Mortgage Fund. Since commencement of operations, Angel Oak Mortgage Fund has conducted all of its investment activity through us.

              We are externally managed and advised by our Manager, a registered investment adviser under the Advisers Act and an affiliate of Angel Oak. Angel Oak is a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets. Angel Oak Capital was established in 2009 and had approximately $10.6 billion in assets under management as of December 31, 2020, across private credit strategies, multi-strategy funds, separately managed accounts and mutual funds, including $6.4 billion of mortgage-related assets. Angel Oak Mortgage Lending is a market leader in non-QM loan production and, as of December 31, 2020, had originated over $8.8 billion in total non-QM loan volume since its inception in 2011. Angel Oak is headquartered in Atlanta and has over 650 employees across its enterprise.

              Through our relationship with our Manager, we benefit from Angel Oak's vertically integrated platform and in-house expertise, providing us with the resources that we believe are necessary to

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    generate attractive risk-adjusted returns for our stockholders. Angel Oak Mortgage Lending provides us with proprietary access to non-QM loans, as well as transparency over the underwriting process and the ability to acquire loans with our desired credit and return profile. We believe our ability to identify and acquire target assets through the secondary market is bolstered by Angel Oak's experience in the mortgage industry and expertise in structured credit investments. In addition, we believe we have significant competitive advantages due to Angel Oak's analytical investment tools, extensive relationships in the financial community, financing and capital structuring skills, investment surveillance capabilities and operational expertise.

              We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. Commencing with our taxable year ended December 31, 2019, we believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Code. Our qualification as a REIT, and maintenance of such qualification, will depend on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our stock. We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act.

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

              As of December 31, 2020, we had total assets of approximately $509.7 million, including an approximate $308.2 million portfolio of non-QM loans and other target assets, which were financed with several term securitizations as well as with in-place loan financing lines and repurchase facilities with a combination of global money center and large regional banks. Our portfolio consists primarily of mortgage loans and mortgage-related assets that have been underwritten in-house by Angel Oak Mortgage Lending, and are subject to Angel Oak Mortgage Lending's rigorous underwriting guidelines and procedures. As of the date of origination and deal date of each of the loans underlying our portfolio of RMBS issued in AOMT securitizations that we participated in, such loans had a weighted average FICO score of 715, a weighted average LTV of 76.4% and a weighted average down payment of approximately $100,000. During the year ended December 31, 2020, we generated a return on average equity of 0.3%.

    Recent Developments

      COVID-19

              The COVID-19 pandemic is causing severe and unprecedented disruptions to the U.S. and global economies and has contributed to volatility and negative pressure in financial markets. The outbreak has led governments and other authorities around the world to impose or re-impose measures intended to control its spread, including restrictions on freedom of movement, such as quarantine and "stay-at-home" orders, restrictions on travel and transport, school closures, limits on the operations of non-essential businesses and other workforce pressures.

              The impact of the COVID-19 pandemic, measures to prevent its spread and government actions to mitigate its impact had an adverse effect on us in the past and may continue to adversely affect us as long as the outbreak persists and potentially even longer. The ultimate impact of the COVID-19 pandemic on us depends on many factors that are not within our control, including, but not limited, to: governmental, business and individuals' actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic, and actions taken in response thereto, on global and regional

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    economies and economic activity; the availability of U.S. federal, state, local or non-U.S. funding programs; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. However, to the extent current conditions worsen, it could have a material adverse effect on the value of our assets, our financial condition, results of operations and liquidity, and, in turn, cash available for distribution to our stockholders. Even after the COVID-19 pandemic subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.

              As a result of COVID-19, Angel Oak Mortgage Lending scaled down its operations considerably and ceased new originations for a period commencing in March 2020, and in May 2020 re-entered the market. Angel Oak Mortgage Lending re-entered the originations market with a more limited offering of non-QM loans than prior to the COVID-19 pandemic and has tightened the underwriting criteria in effect under the programs that it is currently offering. As a result, the volume of non-QM loans available for us to purchase from Angel Oak Mortgage Lending has been more limited than prior to the COVID-19 pandemic, although the volume has increased considerably from May 2020 to February 2021. Prior to the onset of the COVID-19 pandemic in the United States, between January 1, 2020 and March 31, 2020, we acquired 958 loans for an aggregate purchase price of $389.1 million. We paused loan purchases in April 2020 through August 2020, resuming purchases in September 2020. From September 1, 2020 through March 5, 2021, we have purchased 316 loans for an aggregate purchase price of $167.2 million. Due to the uncertainty as to the duration of the COVID-19 pandemic and the timing of the reopening of the economy, we are not able to predict with any significant level of confidence the timeline for the return of the market for the origination of non-QM loans at levels experienced prior to the COVID-19 pandemic. However, we are currently well-positioned to invest large amounts of capital into our target assets consistent with our strategy of making credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending. Although we remain wary of the potential resurgence of COVID-19 infections in the United States, we believe our portfolio remains strong and our pipeline of potential loan opportunities from Angel Oak Mortgage Lending remains robust and continues to increase since Angel Oak Mortgage Lending re-entered the originations market for non-QM loans in May 2020.

              For further discussion of the impacts of the COVID-19 pandemic on us, see "Risk Factors — Risks Related to the COVID-19 Pandemic — The COVID-19 pandemic, measures intended to prevent its spread and government actions to mitigate its economic impact have caused, and are expected to continue to cause, severe and unprecedented disruptions in the U.S. and global economies and financial markets, and had an adverse effect on us in the past and could have a material adverse effect on us in the future."

      Loan Acquisitions

              From January 1, 2021 through March 5, 2021, we acquired $59.6 million in UPB of non-QM loans from Angel Oak Mortgage Lending for an aggregate purchase price of $61.6 million.

      Drawdown of Capital Commitments

              In February 2021, Angel Oak Mortgage Fund completed a drawdown of $56.3 million of capital commitments from its limited partners. As of the date of this prospectus, no capital commitments to Angel Oak Mortgage Fund remain outstanding. Subsequent to December 31, 2020 through March 5, 2021, Angel Oak Mortgage Fund contributed approximately $48.3 million to us.

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      Loan Financing Lines

              On January 5, 2021, we entered into an amendment with Banc of California, National Association ("Banc of California") with respect to our loan financing line to extend the maturity date from January 9, 2021 to February 18, 2021. On February 18, 2021, we entered into an amendment with Banc of California with respect to our loan financing line to extend the maturity date from February 18, 2021 to March 31, 2021. We are currently in negotiations with Banc of California to amend and extend the maturity of the loan financing line for an additional year, however there can be no assurance that we will be successful in executing such amendment upon the terms contemplated or other terms, or at all.

              On March 5, 2021, we and our subsidiary entered into a master repurchase agreement with Goldman. Pursuant to the agreement, we or our subsidiary may sell to Goldman, and later repurchase, up to $200.0 million aggregate borrowings on mortgage loans. The agreement expires on March 5, 2022, unless terminated earlier pursuant to the terms of the agreement.

    Critical Accounting Policies

              Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP and are included elsewhere in this prospectus. The preparation of financial statements in accordance with GAAP requires us to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates and other estimates that affect the reported amounts of certain assets and liabilities as of the date of our consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material. Our Manager believes that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require among the most difficult, subjective or complex judgments.

      Fair Value Measurements

              We report various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option. A fair value measurement represents the price at which an orderly transaction would occur between willing market participants at the measurement date. This definition of fair value focuses on exit price and prioritizes the use of market-based inputs over entity-specific inputs when determining fair value. Inputs may be observable or unobservable.

      Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity.

      Unobservable inputs are inputs that reflect the reporting entity's own assumptions.

              A fair value hierarchy for inputs is implemented in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs are used when available. The availability of valuation techniques and the ability to attain observable inputs can vary from investment to investment and are affected by a wide variety of factors, including the type of investment, whether the investment is newly issued and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the transaction.

              The fair value hierarchy is categorized into three broad levels based on the inputs as follows:

              Level 1 — Valuations based on unadjusted, quoted prices in active markets for identical assets or liabilities.

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              Level 2 — Valuations based on quoted prices in an inactive market, or whose values are based on models — but the inputs to those models are observable either directly or indirectly for substantially the full term of the assets and liabilities. Level 2 inputs include the following:

      a)
      Quoted prices for similar assets and liabilities in active markets (e.g., restricted stock);

      b)
      Quoted prices for identical or similar assets and liabilities in non-active markets (e.g., corporate and municipal bonds);

      c)
      Pricing models whose inputs are observable for substantially the full term of the assets and liabilities (e.g., OTC derivatives); and

      d)
      Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (e.g., residential and commercial mortgage-related assets, including whole loans, securities and derivatives).

              Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Valuation of these assets is typically based on our Manager's own assumptions or expectations based on the best information available. The degree of judgment exercised by our Manager in determining fair value is greatest for investments categorized in Level 3.

              The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the actual level is determined based on the level of inputs that is most significant to the fair value measurement in its entirety.

              To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the investments existed. Accordingly, the degree of judgment exercised by our Manager in determining fair value is greatest for investments categorized in Level 3. Transfers, if any, between levels are determined by us on the first day of the reporting period.

      Variable Interest Entities

              A VIE is defined as an entity in which equity investors (1) do not have the characteristics of a controlling financial interest, and/or (2) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (a) the power to control the activities that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

              We perform ongoing reassessments of whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion to change.

      Investment Securities, at Fair Value

              Our investment securities include both U.S. Treasury securities, RMBS and CMBS for which we have adopted the fair value option, and which are classified as available for sale securities and carried at their estimated fair values, with changes in the fair value recorded in other comprehensive income (loss) in our consolidated statements of comprehensive income (loss).

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      Residential and Commercial Mortgage Loans, at Fair Value

              Residential and commercial mortgage loans include loans that we are marketing for sale to third parties, including transfers to securitization entities that we plan to sponsor and contributions to other securitization entities. Coupon interest is recognized as revenue when earned and deemed collectible or until a loan becomes more than 90 days past due, at which point the loan is placed on nonaccrual status. A delinquent loan previously placed on nonaccrual status is cured when all delinquent principal and interest have been remitted by the borrower, at which point the loan is placed back on accrual status. Changes in fair value for these loans are recurring and are reported in net unrealized gains (losses) on derivative contracts and mortgage loans in our consolidated statements of comprehensive income (loss).

      Purchases and Sales of Investment Securities

              We account for a contract for the purchase or sale of investment securities on a trade date basis. Sales of investments are driven by our portfolio management process. We seek to mitigate risks, including those associated with prepayments, and will opportunistically rotate the portfolio into securities and/or other investments our Manager believes have more favorable attributes. Strategies may also be employed to manage net capital gains, which need to be distributed for tax purposes.

              At the time of disposition, realized gains or losses on sales of investments are determined based on a specific identification basis and are a component of net realized loss on derivative contracts, RMBS, CMBS and mortgage loans in our consolidated statements of comprehensive income (loss).

      Revenue Recognition

      Investment Securities

              Interest income on investment securities is recognized based on outstanding principal balances and contractual terms. Premiums and discounts are generally amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayments.

      Residential Mortgage Loans

              Interest income on residential mortgage loans is recognized using the effective interest method over the life of the loans. The amortization of any premiums and discounts is included in interest income. Interest income recognition is suspended when residential mortgage loans are placed on nonaccrual status. Generally, residential mortgage loans are placed on nonaccrual status when delinquent for more than 90 days or when determined not to be probable of full collection. Interest accrued, but not collected, at the date residential mortgage loans are placed on nonaccrual status is reversed and subsequently recognized only to the extent it is received in cash or until it qualifies for return to accrual status.

      Commercial Real Estate Loans

              Interest income on commercial real estate loans is recognized using the effective interest method over the life of the loans. The amortization of any related premiums and discounts is included in interest income. Interest income recognition is suspended when the commercial real estate loan becomes more than 90 days past due. Interest received after the loan becomes past due or impaired is used to reduce the outstanding loan principal balance. A delinquent loan previously placed on nonaccrual status is placed back on accrual status when all delinquent principal and interest has been remitted by the borrower. Alternatively, the delinquent or impaired loan may be placed back on accrual status if restructured and after the loan is considered re-performing. A restructured loan is considered re-performing when the loan has been current for at least 12 months.

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      Use of Estimates

              The use of GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

    Results of Operations

              Our results of operations presented herein do not reflect the expenses typically associated with being a public company, including the payment of increased directors' fees for our independent directors and the expenses incurred in complying with the reporting and other requirements of the Exchange Act, the payment of a base management fee and an incentive fee to our Manager as a result of differences in the way fees and expense reimbursements are calculated under the management agreement as compared to the pre-IPO management agreement, as described below, equity compensation expense and increased legal and accounting fees. Additionally, pursuant to the management agreement, we will be required to reimburse our Manager for its operating expenses, including third-party expenses, incurred on our behalf and our Manager will also be entitled to reimbursement for costs of the wages, salaries and benefits incurred by our Manager for our dedicated Chief Financial Officer and Treasurer and a pro rata portion of the costs of the wages, salaries and benefits incurred by our Manager with respect to a partially dedicated employee based on the percentage of such person's working time spent on matters related to us. Our results of operations subsequent to this offering will reflect these expenses. Moreover, prior to the completion of this offering, we have avoided registration under the Investment Company Act, among other things, on the basis that all of our holders are "qualified purchasers," as defined under the Investment Company Act. Subsequent to the completion of this offering, this will no longer be the case and we will have to conduct our business and comprise our portfolio of assets in a manner that enables us to avoid such registration. See "Risk Factors — Risks Related to Our Company — Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations." Accordingly, our results of operations presented herein are not indicative of the results of operations that we expect to realize subsequent to this offering.

              COVID-19 Impact.    In addition to the foregoing differences that will be applicable following this offering, the significant and wide-ranging response of governmental and other authorities to the COVID-19 pandemic in states and regions across the United States and the world, including the imposition of quarantine and "stay-at-home" orders, restrictions on travel and transport, school closures, limits on the operations of non-essential businesses and other workforce pressures, and the volatile economic, business and financial market conditions resulting therefrom, have adversely affected our business, financial performance and operating results in the first and second quarters of 2020 and may adversely affect us in future periods. The ultimate impact of the COVID-19 pandemic on us depends on many factors that are not within our control.

              For further discussion of the impacts of the COVID-19 pandemic on us, see "Risk Factors — Risks Related to the COVID-19 Pandemic — The COVID-19 pandemic, measures intended to prevent its spread and government actions to mitigate its economic impact have caused, and are expected to continue to cause, severe and unprecedented disruptions in the U.S. and global economies and financial markets, and had an adverse effect on us in the past and could have a material adverse effect on us in the future."

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    Years Ended December 31, 2020 and 2019

              The following table summarizes our results of operations for the years ended December 31, 2020 and 2019 (dollars in thousands).

     
     For the Year
    Ended
    December 31,
    2020
     For the Year
    Ended
    December 31,
    2019
     

    Interest income, net

           

    Interest income

     $40,820 $19,719 

    Interest expense

      7,499  7,944 

    Net interest income

      33,321  11,775 

    Realized and unrealized gains (losses), net

           

    Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans

      (20,793) (854)

    Net unrealized gain (loss) on derivative contracts and mortgage loans

      (2,144) 876 

    Total realized and unrealized gains (losses), net

      (22,937) 22 

    Expenses

           

    Operating and investment expenses

      2,036  1,928 

    Operating expenses incurred with affiliate

      1,742  1,410 

    Securitization costs

      2,527  2,426 

    Management fee incurred with affiliate

      3,343  890 

    Total operating expenses

      9,648  6,654 

    Net income

      736  5,143 

    Preferred dividends

      (15) (14)

    Net income allocable to common stockholder

     $721 $5,129 

    Other comprehensive income (loss)

      (4,593) 3,554 

    Total comprehensive income (loss)

     $(3,872)$8,683 

    Basic and diluted earnings per share of common stock

     $721 $5,129 

    Net Income

              Net income for the years ended December 31, 2020 and 2019 was $721,000 and $5.1 million, respectively.

      Net Interest Income

              Net interest income for the years ended December 31, 2020 and 2019 was $33.3 million and $11.8 million, respectively. Net interest income for the year ended December 31, 2020 was higher than the comparable period during 2019 due to an increase in the average amount of mortgage loans and RMBS and the addition of CMBS to our portfolio during the year ended December 31, 2020.

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              The components of net interest income are shown in the table below as of and for the years ended December 31, 2020 and 2019 (dollars in thousands).

     
     As of and for the
    Year Ended
    December 31,
    2020
     As of and for the
    Year Ended
    December 31,
    2019
     
    Interest income
     Interest
    Income/
    Expense
     Average
    balance
     Interest
    Income/
    Expense
     Average
    balance
     

    Residential mortgage loans

     $13,013 $232,075 $8,149 $130,019 

    Commercial real estate loans

      1,940  28,979  787   

    RMBS

      25,415  118,174  10,099   

    U.S. Treasury bills

      110  118,174  568  98,821 

    CMBS

      295  1,359     

    Other interest income

      47  42,300  116  395 

    Total interest income

      40,820     19,719    

    Interest expense

                 

    Notes payable

      (6,624) 189,212  (6,326) 93,888 

    Repurchase facilities

      (875) 136,835  (1,618) 98,506 

    Total interest expense

      (7,499)    (7,944)   

    Net interest income

     $33,321    $11,775    

      Total Realized and Unrealized Gains (Losses)

              Total realized and unrealized gains (losses), net for the years ended December 31, 2020 and 2019 were $(22.9) million and $22,000, respectively.

              The components of total realized and unrealized gains (losses), net for the years ended December 31, 2020 and 2019 were as follows (dollars in thousands).

     
     For the Year
    Ended
    December 31,
    2020
     For the Year
    Ended
    December 31,
    2019
     

    Gain on securitization

     $2,946 $4,958 

    Realized loss on RMBS, net

      (9,629) (3,419)

    Realized loss on interest rate futures

      (14,076) (2,432)

    Unrealized and realized loss on residential mortgage loans

      (1,396) (54)

    Realized and unrealized (loss) gain on commercial real estate loans

      (517) 53 

    Realized and unrealized (loss) gain on U.S. Treasury bills

      (8) (20)

    Unrealized appreciation (depreciation) on interest rate futures

      (257) 937 

    Total realized and unrealized gains (losses), net

     $(22,937)$22 

              Gain on securitizations during the year ended December 31, 2020 decreased as compared to the year ended December 31, 2019 due to the execution of the AOMT 2020-3 securitization in June 2020 at a lower premium to the carrying value of the loans securitized due to an increased cost of funding of the sold portions of the securitization.

              Realized loss on RMBS, net principally represents the interest only bond values, which decrease over time as the notional value of the bond decreases as the loans in a securitization experience normal principal payments and prepayments. The increase in the realized loss on RMBS, net relate principally to the average increase in interest only bonds held by us during 2020 as compared to 2019. Realized and

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    unrealized gain (loss) on commercial real estate loans, and unrealized and realized loss on residential mortgage loans were all substantially affected by unrealized losses arising from volatility in valuations for the year ended December 31, 2020, resulting from the economic consequences of the COVID-19 pandemic. As of December 31, 2020, our RMBS portfolio, excluding senior bonds, was carried at an average discount of approximately 7%. The same items for the year ended December 31, 2019 were reflective of lower average balances and a more stable economic environment.

              Realized loss on interest rate futures and unrealized appreciation (depreciation) on interest rate futures during the year ended December 31, 2020 was substantially comprised of realized losses in the first half of 2020 due to the substantial volatility in the interest rate environment caused by the economic consequences of the COVID-19 pandemic. Realized loss on interest rate futures and unrealized appreciation (depreciation) on interest rate futures for the year ended December 31, 2019 was more reflective of a stable interest rate environment.

    Expenses

      Operating and Investment Expenses

              For the years ended December 31, 2020 and 2019, our operating and investment expenses were $2.0 million and $1.9 million, respectively. Operating and investment expenses increased during the year ended December 31, 2020 as compared to the year ended December 31, 2019 mainly due to an increase in loan purchase volume during 2020 as compared to 2019 and the related diligence expenses.

      Operating Expenses Incurred with Affiliate

              We are required to pay our Manager, in cash, reimbursements for certain expenses pursuant to the pre-IPO management agreement. The pre-IPO management agreement will terminate upon the completion of this offering and our formation transactions, and we and our operating partnership will enter into the management agreement with our Manager effective as of the completion of this offering. Pursuant to the management agreement, our Manager will be entitled to reimbursement of certain expenses as described in the management agreement. See "Our Manager and the Management Agreement — The Management Agreement" for additional information regarding the fees that will be payable to our Manager under the management agreement.

              For the years ended December 31, 2020 and 2019, our operating expenses incurred with affiliate were $1.7 million and $1.4 million, respectively. Our operating expenses incurred with affiliate increased during the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to an increase in time spent by our partially dedicated employee on matters related to us as we increased the scale of our operations.

      Securitization Costs

              Securitization costs are incurred on our off-balance sheet securitization transactions. Securitization costs for the years ended December 31, 2020 and 2019 were $2.5 million and $2.4 million, respectively. Securitization costs increased during the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to our increased participation in securitizations during 2020 based on the UPB of the loans securitized. We had participated in three securitizations along with other Angel Oak managed entities during the year ended December 31, 2019 and two during the year ended December 31, 2020. The volume of our contributed mortgage loans to each securitization ranged from approximately 31% to 91% of the total securitization pool. The expense incurred in these securitization transactions generally increase as the UPB of the loans we contribute increases and, in securitizations with multiple entities participating, we are allocated expenses based on the relative percentage of the overall loans contributed. We anticipate participating in future securitizations with Angel Oak managed-entities and may also offer securitizations comprised solely of mortgage loans held by us in the future.

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      Management Fee Incurred with Affiliate

              We are required to pay our Manager, in cash, a management fee pursuant to the pre-IPO management agreement. The management fee payable under the pre-IPO management agreement is calculated based on the Actively Invested Capital of the limited partners in Angel Oak Mortgage Fund (as defined in the limited partnership agreement of Angel Oak Mortgage Fund), which we believe is reflective of a typical management fee payable by a private investment vehicle. The pre-IPO management agreement will terminate upon the completion of this offering and our formation transactions, and we and our operating partnership will enter into the management agreement with our Manager effective as of the completion of this offering. Pursuant to the management agreement, our Manager will be entitled to a base management fee, which will be calculated based on our Equity, and an incentive fee based on certain performance criteria, as well as a termination fee in certain cases and reimbursement of certain expenses as described in the management agreement. See "Our Manager and the Management Agreement—The Management Agreement" for additional information regarding the fees that will be payable to our Manager under the management agreement.

              For the years ended December 31, 2020 and 2019, our management fee incurred with affiliate was $3.3 million and $890,000, respectively. Our management fee incurred with affiliate increased during the year ended December 31, 2020 as compared to the year ended December 31, 2019 mainly due to additional equity capital being deployed during 2020 as we received additional equity capital from our common stockholder.

    Key Financial Measures and Indicators

              As a real estate finance company, we believe the key financial measures and indicators for our business are Core Earnings, core return on average equity and book value per share.

      Core Earnings

              Core Earnings is a non-GAAP measure and is defined as net income (loss) allocable to common stockholders, calculated in accordance with GAAP, excluding (1) unrealized gains on our aggregate portfolio, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other non-recurring gains or losses determined after discussions between our Manager and our independent directors and approval by a majority of our independent directors. As defined, Core Earnings include interest income and expense as well as realized losses on interest rate futures or swaps used to hedge interest rate risk and other expenses. We believe that the presentation of Core Earnings provides investors with a useful measure to facilitate comparisons of financial performance between our REIT peers, but has important limitations. We believe Core Earnings as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, Core Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Core Earnings may not be comparable to similar measures presented by other REITs.

              We also will use Core Earnings to determine the incentive fee payable to our Manager pursuant to the management agreement. For information on the fees that will be payable to our Manager under the management agreement, see "Our Manager and the Management Agreement — The Management Agreement."

              For the years ended December 31, 2020 and 2019, Core Earnings were approximately $2.8 million and $4.2 million, respectively. The table below reconciles net income allocable to common stockholder,

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    calculated in accordance with GAAP, to Core Earnings for the years ended December 31, 2020 and 2019 (dollars in thousands).

     
     Year Ended
    December 31,
    2020
     Year Ended
    December 31,
    2019
     

    Net income allocable to common stockholder

     $721 $5,129 

    Adjustments:

           

    Net other-than-temporary credit impairment losses

         

    Net unrealized (gains) losses on derivatives

      257  (937)

    Net unrealized (gains) losses on residential loans

      1,371  54 

    Net unrealized (gains) losses on commercial real estate loans

      517   

    Net unrealized (gains) losses on financial instruments at fair value

      14  (4)

    (Gains) losses on extinguishment of debt

         

    Non-cash equity compensation expense

         

    Incentive fee earned by our Manager

         

    Realized (gains) losses on terminations of interest rate swaps

         

    Total other (gains) losses

         

    Core Earnings

     $2,880 $4,242 

              Core Earnings for the three months ended March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020 were $(7.7) million, $2.2 million, $3.6 million and $4.7 million, respectively. The table below reconciles net income (loss) allocable to common stockholder, calculated in accordance with GAAP, to Core Earnings for the three months ended March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020 (dollars in thousands).

     
     Three Months Ended 
     
     March 31,
    2020
     June 30,
    2020
     September 30,
    2020
     December 31, 2020 

    Net income (loss) allocable to common stockholder

     $(36,736)$26,221 $4,238 $6,998 

    Adjustments:

                 

    Net other-than-temporary credit impairment losses

             

    Net unrealized (gains) losses on derivatives

      1,345  (1,169) (101) 182 

    Net unrealized (gains) losses on residential loans

      25,425  (22,586) (429) (1,039)

    Net unrealized (gains) losses on commercial real estate loans

      2,224  (254) (86) (1,367)

    Net unrealized (gains) losses on financial instruments at fair value

      18  (8)   4 

    (Gains) losses on extinguishment of debt

             

    Non-cash equity compensation expense

             

    Incentive fee earned by our Manager

             

    Realized (gains) losses on terminations of interest rate swaps

             

    Total other (gains) losses

             

    Core Earnings

     $(7,724)$2,204 $3,622 $4,778 

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      Core Return on Average Equity

              Core return on average equity is a non-GAAP measure and is defined as annual or annualized Core Earnings divided by average total stockholders' equity. We believe that the presentation of core return on average equity provides investors with a useful measure to facilitate comparisons of financial performance between our REIT peers, but has important limitations. Additionally, we believe core return on average equity provides investors with additional detail on the Core Earnings generated by our invested equity capital. We believe core return on average equity as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, core return on average equity should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating core 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 core return on average equity may not be comparable to similar measures presented by other REITs. Set forth below is our computation of core return on average equity for the years ended December 31, 2020 and 2019 (dollars in thousands):

     
     Year Ended
    December 31, 2020
     Year Ended
    December 31, 2019
     

    Core Earnings

     $2,880 $4,242 

    Average total stockholders' equity

     $171,586 $57,682 

    Core return on average equity

      1.7% 7.4%

              Set forth below is our computation of core return on average equity for the three months ended March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020 (dollars in thousands):

     
     Three Months Ended 
     
     March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 

    Core Earnings

     $(7,724)$2,204 $3,622 $4,778 

    Average total stockholders' equity

     $169,108 $265,464 $254,792 $235,159 

    Core return on average equity

      (18.3)% 3.3% 5.7% 8.1%

      Book Value Per Share

              The following table sets forth the calculation of our book value per share as of December 31, 2020 and 2019 (dollars in thousands, except per share data):

     
     As of
    December 31, 2020
     As of
    December 31, 2019
     

    Total stockholders' equity

     $248,309 $94,863 

    Preferred stock

      (101) (101)

    Stockholders' equity, net of preferred stock

     $248,208 $94,762 

    Number of shares outstanding at period end

      1,000  1,000 

    Book value per share

     $248,208 $94,762 

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              The following table sets forth the calculation of our book value per share as of March 31, 2020, June 30, 2020 and September 30, 2020 (dollars in thousands, except per share data):

     
     As of
    March 31, 2020
     As of
    June 30, 2020
     As of
    September 30, 2020
     

    Total stockholders' equity

     $243,353 $287,574 $222,009 

    Preferred stock

      (101) (101) (101)

    Stockholders' equity, net of preferred stock

     $243,252 $287,473 $221,908 

    Number of shares outstanding at period end

      1,000  1,000  1,000 

    Book value per share

     $234,252 $287,473 $221,908 

    Liquidity and Capital Resources

      Overview

              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. Prior to this offering and our formation transactions, our primary sources of liquidity have included drawdowns against equity commitments made by: partners in Angel Oak Mortgage Fund, our then sole common stockholder; available borrowings under our in-place loan financing lines and repurchase facilities; and securitization transactions. Following the completion of this offering and our formation transactions, Angel Oak Mortgage Fund will be terminated and uncalled equity commitments, if any, will be cancelled.

              Following the completion of this offering and our formation transactions, we expect that our financing sources will primarily include the net proceeds of this offering, payments of principal and interest we receive on our portfolio, cash generated from operations and unused borrowing capacity under our in-place loan financing lines and repurchase facilities, as well as additional financing sources. Depending on market conditions, we expect that our primary sources of financing going forward will include securitizations, loan financing lines and repurchase facilities. In the future, we may also utilize other types of borrowings, including bank credit facilities and warehouse lines of credit, among others. We may also seek to raise additional capital through public or private offerings of equity, equity-related or debt securities, depending upon market conditions. The use of any particular source of capital and funds will depend on market conditions, availability of these sources and the investment opportunities available to us.

              We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we expect to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long-term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements.

              Securitizations may either take the form of the issuance of Securitized Bonds or the sale of REMIC Certificates, with the securitization proceeds being used in part to repay pre-existing loan financing lines and repurchase facilities. We have sponsored and participated in securitization transactions with other entities that are managed by Angel Oak, and may continue to do so in the future.

              We believe these identified sources of financing will be adequate for purposes of meeting our short-term (within one year) liquidity and our longer-term liquidity needs. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions.

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      COVID-19 Impact

              We are continuing to monitor the COVID-19 pandemic and its impact on us, the borrowers underlying our investments, our financing sources, and the economy as a whole. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the COVID-19 pandemic's impact on our operations and liquidity remains uncertain and difficult to predict. To the extent that we, the borrowers underlying our investments, our financing sources and the economy as a whole continue to be impacted by the COVID-19 pandemic, it could have a material adverse effect on our liquidity and capital resources.

              For further discussion of the impacts of the COVID-19 pandemic on us, see "Risk Factors — Risks Related to the COVID-19 Pandemic — The COVID-19 pandemic, measures intended to prevent its spread and government actions to mitigate its economic impact have caused, and are expected to continue to cause, severe and unprecedented disruptions in the U.S. and global economies and financial markets, and had an adverse effect on us in the past and could have a material adverse effect on us in the future."

      Description of Existing Financing Arrangements

              Loan Financing Lines.    As of December 31, 2020, we were a party to three loan financing lines, which permitted borrowings in an aggregate amount of up to $525.0 million. Subsequent to December 31, 2020, we entered into a loan financing line with Goldman. Borrowings under these agreements may be used to purchase whole loans for securitization or loans purchased for long-term investment purposes. A description of each loan financing line follows.

              Nomura Loan Financing Line.    On December 6, 2018, we and one of our subsidiaries entered into a master repurchase agreement with Nomura Corporate Funding Americas, LLC ("Nomura"). From time to time, we and one of our subsidiaries have amended such master repurchase agreement with Nomura. Pursuant to the agreement, we and our subsidiary may sell to Nomura, and later repurchase, up to $300.0 million aggregate borrowings on mortgage loans. The agreement expires on December 3, 2021, unless terminated earlier pursuant to the terms of the agreement. Our and our subsidiary's obligations under the agreement are fully guaranteed by Angel Oak Mortgage Fund.

              The principal amount paid by Nomura for each eligible mortgage loan is based on a percentage of both the market value and unpaid principal balance of the mortgage loan (generally ranging from 65% to 85%, depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement, Nomura retains the right to determine the market value of the mortgage loan collateral in its sole and absolute discretion. The loan financing line is marked-to-market at fair value. Additionally, Nomura is under no obligation to purchase the eligible mortgage loans we offer to sell to them. Upon our or our subsidiary's repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Nomura the adjusted 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) one-month LIBOR and (b) the applicable LIBOR floor, and (2) a spread generally ranging from 2.00% to 3.35% depending on the type of loan.

              The agreement requires Angel Oak Mortgage Fund, as guarantor, to maintain various financial and other covenants, such as that: (1) adjusted tangible net worth on an aggregate basis must not be less than the sum of 50% of the guarantor's adjusted tangible net worth as of the date of the agreement plus 50% of any future capital raised by the guarantor; (2) adjusted tangible net worth must not decline more than 25% in any rolling three month period or 35% in any rolling twelve month period; (3) the ratio of indebtedness to adjusted tangible net worth must not exceed 7:1; and (4) liquidity, on an aggregate basis, must exceed the greater of 5% of the aggregate purchase price and $2 million.

              The agreement contains margin call provisions that provide Nomura with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions,

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    Nomura may require us or our subsidiary to transfer cash and/or additional eligible mortgage loans with an aggregate market value sufficient to eliminate any margin deficit resulting from such a decline.

              In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, material adverse effects, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Nomura's right to liquidate the mortgage loans then subject to the agreement.

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

              On or prior to the completion of this offering, we expect to become the guarantor under such agreement in place of Angel Oak Mortgage Fund, which will be terminated upon the completion of this offering.

              Banc of California Loan Financing Line.    On December 21, 2018, we and our subsidiary entered into a master repurchase agreement with Banc of California, National Association ("Banc of California"). From time to time, we and one of our subsidiaries have amended such master repurchase agreement with Banc of California. Pursuant to the agreement, we or our subsidiary may sell to Banc of California, and later repurchase, up to $75.0 million aggregate borrowings on mortgage loans. The agreement expires on March 31, 2021, unless terminated earlier pursuant to the terms of the agreement. We are currently in negotiations with Banc of California to amend and extend the maturity of the loan financing line for an additional year, however there can be no assurance that we will be successful in executing such amendment upon the terms contemplated or other terms, or at all. Our and our subsidiary's obligations under the agreement are fully guaranteed by Angel Oak Mortgage Fund.

              The principal amount paid by Banc of California for each mortgage loan is based on the lesser of (1) a percentage of the original principal amount of the mortgage loan (ranging from 75% to 97%) and (2) a percentage of its take-out commitment (97%) or $4.0 million, depending on the loan type. Pursuant to the agreement, Banc of California retains the right to determine the market value of the mortgage loan collateral in its sole discretion. Upon our or our subsidiary's repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Banc of California the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) a specified minimum rate (ranging from 3.50% to 4.13%) and (B) one-month LIBOR plus a spread ranging from 2.50% to 3.13%, and (2) in the case of loans with maturities over 364 days, the seasoned spread of 1.0%.

              The agreement requires Angel Oak Mortgage Fund, as guarantor, to maintain various financial and other covenants, which include: (1) a minimum tangible net worth of $40 million consolidated (with a maximum of $10 million in undrawn capital); (2) minimum liquidity of $5 million; (3) a maximum ratio of total liabilities to tangible net worth of 10:1; and (4) positive net income as of the last day of each calendar quarter for the four consecutive fiscal quarters ended December 31, 2019.

              The agreement contains margin call provisions that provide Banc of California with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Banc of California may require us or our subsidiary to transfer cash and/or additional eligible mortgage loans with an aggregate market value sufficient to eliminate any margin deficit resulting from such a decline.

              In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, material adverse effects, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also

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    customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Banc of California's right to liquidate the mortgage loans then subject to the agreement.

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

              On or prior to the completion of this offering, we expect to become the guarantor under such agreement in place of Angel Oak Mortgage Fund, which will be terminated upon the completion of this offering.

              Deutsche Bank Loan Financing Line.    On February 13, 2020, we and our subsidiary entered into a master repurchase agreement with Deutsche Bank. From time to time, we and one of our subsidiaries have amended such master repurchase agreement with Deutsche Bank. Pursuant to the agreement, we or our subsidiary may sell to Deutsche Bank, and later repurchase, up to $150.0 million aggregate borrowings on mortgage loans. The agreement expires on February 11, 2022, unless terminated earlier pursuant to the terms of the agreement. Our and our subsidiary's obligations under the agreement are fully guaranteed by Angel Oak Mortgage Fund.

              The principal amount paid by Deutsche Bank for each mortgage loan is based on a percentage of the market value, cost-basis value or unpaid principal balance of the mortgage loan (generally ranging from 60% to 92%, depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement, Deutsche Bank retains the right to determine the market value of the mortgage loan collateral in its sole good faith discretion. The loan financing line is marked-to-market at fair value. Additionally, Deutsche Bank is under no obligation to purchase the eligible mortgage loans we offer to sell to them. Upon our or our subsidiary's repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) 0.00% and (B) one-month LIBOR and (2) a spread generally ranging from 1.65% to 2.50%.

              The agreement requires Angel Oak Mortgage Fund, as guarantor, to maintain various financial and other covenants, which include: (1) a minimum net asset value at least equal to the greater of (a) $40 million and (b) 20% of the maximum aggregate purchase price under the loan financing line; (2) minimum liquidity in an amount at least equal to the greater of (a) $5 million and (b) 3% of any outstanding purchase price for such mortgage loans; and (3) a maximum ratio of total indebtedness to net asset value of 5.5:1.

              The agreement contains margin call provisions that provide Deutsche Bank with certain rights in the event of a decline in the market value or cost-basis value of the purchased mortgage loans. Under these provisions, Deutsche Bank may require us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline.

              In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Deutsche Bank's right to liquidate the mortgage loans then subject to the agreement.

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

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              On or prior to the completion of this offering, we expect to become the guarantor under such agreement in place of Angel Oak Mortgage Fund, which will be terminated upon the completion of this offering.

              As of December 31, 2020, there was an aggregate of approximately $81.9 million of debt outstanding under our three loan financing lines. The table below sets forth additional details regarding our three loan financing lines as of December 31, 2020 (dollars in thousands).

    Line of Credit
     Financing
    Line Limit
     Base Interest Rate Interest
    Rate Spread
     Maturity Date Drawn
    Amount
     

    Nomura Financing Line

     $300,000 1-month LIBOR 2.00% - 3.35% December 2021 $8,011 

    Banc of California Financing Line

      75,000 1-month LIBOR 2.50% - 3.75%(1) January 2021(2)  38,989 

    Deutsche Bank Financing Line

      150,000 1-month LIBOR 1.65% to 2.50% February 2022  34,905 

     $525,000       $81,905 

    (1)
    On February 18, 2021, we entered into an amendment with Banc of California with respect to our loan financing line that amended the interest rate spread on such loan financing line from 2.50% to 3.75% to 2.50% to 3.13%.

    (2)
    On January 5, 2021, we entered into an amendment with Banc of California with respect to our loan financing line to extend the maturity date from January 9, 2021 to February 18, 2021. On February 18, 2021, we entered into an amendment with Banc of California with respect to our loan financing line to extend the maturity date from February 18, 2021 to March 31, 2021.

              As of December 31, 2019, there was an aggregate of approximately $138.5 million of debt outstanding under our two loan financing lines. The table below sets forth additional details regarding our two loan financing lines as of December 31, 2019 (dollars in thousands).

    Line of Credit
     Financing
    Line Limit
     Base Interest Rate Interest
    Rate Spread
     Maturity Date Drawn
    Amount
     

    Nomura Financing Line

      300,000 3-month LIBOR or 1-month LIBOR 1.75% - 3.35% December 2020  101,045 

    Banc of California Financing Line

      100,000 1-month LIBOR 2.63% - 3.75% January 2021  37,412 

     $400,000       $138,457 

              Goldman Loan Financing Line.    On March 5, 2021, we and our subsidiary entered into a master repurchase agreement with Goldman. Pursuant to the agreement, we or our subsidiary may sell to Goldman, and later repurchase, up to $200.0 million aggregate borrowings on mortgage loans. The agreement expires on March 5, 2022, unless terminated earlier pursuant to the terms of the agreement. Our and our subsidiary's obligations under the agreement were fully guaranteed by Angel Oak Mortgage Fund.

              The principal amount paid by Goldman for each eligible mortgage loan is based on a percentage of the outstanding principal balance of the mortgage loan or the market value of the mortgage loan (generally ranging from 75% to 85%, depending on the type of loan), whichever is less. Pursuant to the agreement, Goldman retains the right to determine the market value of the mortgage loan collateral in its sole good faith discretion and in a commercially reasonable manner. The loan financing line is marked-to-market at fair value. Additionally, Goldman is under no obligation to purchase the eligible

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

              The agreement requires Angel Oak Mortgage Fund, as guarantor, to maintain various financial and other covenants, such as that: (1) the minimum tangible net worth of the guarantor and its subsidiaries must not 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 fall below 50% of the guarantor's tangible net worth as of September 30, 2018 plus 50% of any capital contributions made after that date; (2) the minimum liquidity of the guarantor must not fall below the greatest of (x) the product of 5% and the aggregate repurchase price as of such date of determination, (y) $5 million and (z) any other amount of liquidity that Angel Oak Mortgage Fund has covenanted to maintain in any other note, indenture, loan agreement, guaranty, swap agreement or any other contract, agreement or transaction (including, without limitation, any repurchase agreement, loan and security agreement or similar credit facility or agreement for borrowed funds); and (3) the maximum ratio of the guarantor's and its subsidiaries' total indebtedness to tangible net worth must not be greater than 5:1.

              The agreement contains margin call provisions that provide Goldman with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Goldman may require us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline.

              In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Goldman's right to liquidate the mortgage loans then subject to the agreement.

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

              On or prior to the completion of this offering, we expect to become the guarantor under such agreement in place of Angel Oak Mortgage Fund, which will be terminated upon the completion of this offering.

              Short-Term Repurchase Facilities.    In addition to our existing loan financing lines, we employ short-term repurchase facilities to borrow against U.S. Treasury securities, securities issued by AOMT, Angel Oak's securitization platform, and other securities we may acquire in accordance with our investment guidelines. As of December 31, 2020, there was approximately $178.3 million outstanding under these repurchase facilities, with weighted average interest rates ranging from 0.25% to 1.40%.

              The following table summarizes certain characteristics of our short-term repurchase facilities as of December 31, 2020 and December 31, 2019:

    December 31, 2020

    Repurchase Facilities
     Amount
    Outstanding
     Weighted Average
    Interest Rate
     Weighted Average
    Remaining Maturity
    (Days)
     
     
     ($ in thousands)
      
      
     

    U.S. Treasury Bills

     $149,618  0.25% 19 

    AOMT Securities

     $28,673  1.40% 19 

    Total

     $178,291  0.44% 19 

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    December 31, 2019

    Repurchase Facilities
     Amount
    Outstanding
     Weighted Average
    Interest Rate
     Weighted Average
    Remaining Maturity
    (Days)
     
     
     ($ in thousands)
      
      
     

    U.S. Treasury Bills

     $184,386  2.18% 9 

    AOMT Securities

      39,705  2.78% 13 

    Total

     $224,091  2.29% 10 

              The following table presents the amount of collateralized borrowings outstanding under repurchase facilities as of the end of each quarter, the average amount of collateralized borrowings outstanding under repurchase facilities during the quarter and the highest balance of any month end during the quarter (dollars in thousands):

    Quarter End
     Quarter End Balance Average Balance in
    Quarter
     Highest Month End
    Balance in Quarter
     

    Q4 2018

     $197,011 $18,891 $197,011 

    Q1 2019

      130,980  34,969  130,980 

    Q2 2019

      97,349  80,088  130,980 

    Q3 2019

      77,656  57,730  97,349 

    Q4 2019

      224,091  101,167  224,091 

    Q1 2020

      578,860  85,822  578,860 

    Q2 2020

      587,375  69,712  587,375 

    Q3 2020

      50,541  139,439  50,541 

    Q4 2020

      178,291  41,866  178,291 

              We utilize short-term repurchase facilities on our RMBS portfolio and to finance assets for REIT asset test purposes. Over time, the need to purchase securities for REIT asset test purposes will be reduced as we obtain and participate in additional securitizations and acquire assets directly for investment purposes. We will continue to use repurchase facilities on our RMBS portfolio to add additional leverage which increases the yield on those assets Our first use of a repurchase facility was in late December 2018 in order to purchase securities for REIT asset test purposes. These securities were financed on a 30-day repurchase facility and were returned and repaid in January 2019. In the three months ended March 31, 2019, we also used repurchase financing on the AOMT 2019-2 securitization in late March 2019 and to purchase securities for REIT asset test purposes. The net increase in the average balance of collateralized borrowings outstanding under repurchase facilities during 2019 was mainly due to the repurchase financing we used on our outstanding retained securities under the three securitizations in which we participated. The net decrease in the average balance of collateralized borrowings outstanding under repurchase facilities during the year ended December 31, 2020 was mainly due to the reduced need for assets for REIT asset test purposes as we had participated in securitizations during 2020 and held a lower amount of whole loans in AOMR TRS (as defined below) after June 2020.

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

              Securitization Transactions.    In March 2019, we participated in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non-QM loans, secured primarily by first or second liens on one-to-four family residential properties. In the transaction, AOMT 2019-2 issued approximately $620.9 million in face value of bonds. We served as the "sponsor" (as defined in the U.S. Risk Retention Rules) of the transaction, contributing non-QM loans with a carrying value of

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    approximately $255.7 million that we had accumulated and held on our balance sheet to AOMT 2019-2. The remaining non-QM loans that we contributed to AOMT 2019-2 were purchased from affiliated and unaffiliated entities. We received bonds from AOMT 2019-2 with a fair value of approximately $55.8 million, including approximately $33.0 million in Risk Retention Securities (representing 5% of each class of the bonds issued as part of the transaction). We used the proceeds of the securitization transaction to repay outstanding debt of approximately $219.9 million under our existing loan financing lines and retained cash of $13.6 million, which was used to acquire additional non-QM loans and other target assets.

              Additionally, in July 2019, we participated in a second securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non-QM loans, secured primarily by first or second liens on one-to-four family residential properties. In the transaction, AOMT 2019-4 issued approximately $558.5 million in face value of bonds. We contributed non-QM loans with a carrying value of approximately $147.4 million that we had accumulated and held on our balance sheet to AOMT 2019-4, and we received bonds from AOMT 2019-4 with a fair value of approximately $16.8 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $127.0 million and retained cash of $3.9 million, which was used to acquire additional non-QM loans and other target assets.

              In November 2019, we participated in a third securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non-QM loans, secured primarily by first or second liens on one-to-four family residential properties. In the transaction, AOMT 2019-6 issued approximately $544.5 million in face value of bonds. We contributed non-QM loans with a carrying value of approximately $104.3 million that we had accumulated and held on our balance sheet to AOMT 2019-6, and we received bonds from AOMT 2019-6 with a fair value of approximately $10.7 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $92.9 million and retained cash of $928,000, which was used to acquire additional non-QM loans and other target assets.

              In June 2020, we participated in a fourth securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non-QM loans, secured primarily by first or second liens on one-to-four family residential properties. In the transaction, AOMT 2020-3 issued approximately $530.3 million in face value of bonds. We served as the "sponsor" (as defined in the U.S. Risk Retention Rules) of the transaction, contributing non-QM loans with a carrying value of approximately $482.9 million that we had accumulated and held on our balance sheet to AOMT 2020-3. The remaining non-QM loans that we contributed to AOMT 2020-3 were purchased from affiliated and unaffiliated entities. We received bonds from AOMT 2020-3 with a fair value of approximately $66.5 million, including approximately $23.0 million in horizontal Risk Retention Securities (representing 5% of the fair value of the securities and other interests issued as part of the transaction). We used the proceeds of the securitization transaction to repay outstanding debt of approximately $394.4 million and retained cash of $42.3 million, which was used to acquire additional non-QM loans, pay down repurchase facilities and acquire other target assets.

              Angel Oak Mortgage Solutions acted as the servicing administrator in the securitization transactions for AOMT 2019-2, AOMT 2019-4 and AOMT 2019-6 and Angel Oak Home Loans acted as the servicing administrator for AOMT 2020-3, and such entities are responsible for servicing the securitized mortgage loans pursuant to separate pooling and servicing agreements. An affiliate of Wells Fargo Securities, LLC, one of the underwriters in this offering, serves as master servicer of the pools of mortgage loans contributed to AOMT 2019-2, AOMT 2019-4, AOMT 2019-6 and AOMT 2020-3, respectively, in these transactions.

              For additional information regarding the bonds issued to us in these transactions, see "— Our Portfolio — RMBS" below.

              We, along with other Angel Oak managed entities, have also participated together in a commercial real estate loan securitization. In November 2020, we participated in a securitization transaction of a

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    pool of small balance commercial real estate loans consisting of mortgage loans secured by commercial properties. In the transaction, AOMT 2020-SBC1 issued approximately $164.3 million in face value of bonds. We contributed commercial real estate loans with a carrying value of approximately $32.5 million that we had accumulated and held on our balance sheet to AOMT 2020-SBC1, and we received bonds from AOMT 2020-SBC1 with a fair value of approximately $8.9 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $16.6 million and retained cash of $8.2 million, which was used to acquire additional non-QM loans and other target assets. An affiliate of Wells Fargo Securities, LLC, one of the underwriters in this offering, serves as the securities administrator for AOMT 2020-SBC1 and is responsible for, among other things, calculating and making distributions to the securitization's certificate holders.

      Series A Cumulative Non-Voting Preferred Stock

              In January 2019, in order for us to satisfy the 100-holder REIT requirement under the Code, we issued 125 shares of our Series A preferred stock with a liquidation preference of $1,000 per share. The shares of our Series A preferred stock may be redeemed at our option at any time, in whole or in part, for cash equal to $1,000 per share plus all accrued and unpaid dividends thereon to and including the date fixed for redemption.

      Leverage and Hedging Strategies

              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.

              Our use of leverage, especially in order to increase the amount of assets supported by our capital base, may have the effect of increasing losses when these assets underperform. The amount of leverage employed on our assets will depend on our Manager's assessment of the credit, liquidity, price volatility and other risks and availability of particular types of financing at any given time. Moreover, our charter, bylaws and investment guidelines require no minimum or maximum leverage and our Manager will have the discretion, without the need for further approval by our Board of Directors, to change both our overall leverage and the leverage used for individual asset classes. Because our strategy is flexible, dynamic and opportunistic, our overall leverage and the leverage used for individual asset classes will vary over time. As of December 31, 2019, our leverage ratio was approximately 3.82x total debt to total equity, which included debt from our loan financing lines and repurchase facilities, but excluded debt in our non-recourse securitization transactions. We expect our leverage ratio to decrease over time as our RMBS portfolio, which is financed with our repurchase facilities at a rate generally less than 1:1 debt to equity, becomes a larger percentage of our overall portfolio. As of December 31, 2020, our leverage ratio fell to 1.05x total debt to total equity, due to the AOMT 2020-3 securitization in June 2020 and the resulting lower amount of residential mortgage loans held at December 31, 2020. We expect that our leverage ratio will increase in the near term as we continue to purchase additional loans from Angel Oak Mortgage Lending over the next few quarters, and generally will remain at less than 3:1 over time but may exceed this ratio from time to time.

              Subject to qualifying and maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. For example, we may opportunistically enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options.

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    Cash Flows

              The following table provides a breakdown of the net change in our cash and restricted cash for the years ended December 31, 2020 and 2019 (dollars in thousands):

     
     Year Ended
    December 31,
    2020
     Year Ended
    December 31,
    2019
     

    Cash flows provided by (used in) operating activities

     $34,409 $66,010 

    Cash flows (used in) provided by investing activities

      (52,436) (78,705)

    Cash flows provided by (used in) financing activities

      54,798  19,880 

    Net increase (decrease) in cash and restricted cash

     $36,771 $7,185 

              We experienced a net increase in cash of $36.8 million for the year ended December 31, 2020, compared to a net increase of $7.2 million for the year ended December 31, 2019. During 2020, cash flows provided by operating activities totaled $34.4 million related to the cash received in securitization transactions of $505.5 million offset by purchases of residential mortgages of $494.7 million and principal payments on those mortgages of $15.6 million. During 2020, cash flows used in investing activities totaled $52.4 million, which was mainly due to the purchase of additional investment securities during 2020. During 2020, cash flows provided by financing activities totaled $54.8 million, including $234.0 million of contributions from our common stockholder offset by $76.7 million in distributions to our common stockholder and net cash used to repay amounts outstanding under our loan financing lines and short-term repurchase facilities of $102.4 million.

              During 2019, cash flows provided by operating activities totaled $66.0 million related to the cash received in securitization transactions of $512.3 million offset by purchases of residential mortgage loans of $454.7 million and principal payments on those mortgages of $8.0 million. During 2019, cash flows used in investing activities totaled $78.7 million, which was mainly due to the net purchase of investment securities of $70.0 million and purchases of commercial real estate loans for investment purposes of $16.9 million offset by principal payments on securities of $6.1 million. During 2019, cash flows provided by financing activities totaled $19.9 million, including contributions from our common stockholder of $42.0 million and new proceeds from short-term repurchase facilities transactions of $27.1 million offset by net payments of amounts outstanding under our loan financing lines of $49.3 million.

    Our Portfolio

              As of December 31, 2020, our portfolio consisted of approximately $308.2 million of non-QM loans and other target assets. The following table sets forth additional information regarding our portfolio,

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    including the manner in which our equity capital was allocated among investment types, as of December 31, 2020 (dollars in thousands).

    Portfolio
     Fair Value Collateralized
    Debt
     Allocated
    Capital
     % of Total
    Capital
     

    Residential mortgage loans

     $142,030 $80,345 $61,685  24.8%

    Commercial real estate loans

      7,466  1,560  5,906  2.4%

    Total whole loan portfolio

     $149,496 $81,905 $67,591  27.2%

    Investment securities

      
     
      
     
      
     
      
     
     

    RMBS

     $149,936 $28,673 $121,263  48.8%

    CMBS

      8,796    8,796  3.5%

    U.S. Treasury bills

      149,995  149,618  377  0.2%

    Total securities

      308,727  178,291  130,436  52.5%

    Total investment portfolio

     
    $

    458,223
     
    $

    260,196
     
    $

    198,027
      
    79.8

    %

    Cash

     
    $

    43,569
     
    $

     
    $

    43,569
      
    17.5

    %

    Other assets/(other liabilities)

      6,713    6,713  2.7%

    Total

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

              As of December 31, 2019, our portfolio consisted of approximately $260.6 million of non-QM loans and other target assets. The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of December 31, 2019 (dollars in thousands).

    Portfolio
     Fair Value Collateralized
    Debt
     Allocated
    Capital
     % of Total
    Capital
     

    Residential mortgage loans

     $168,556 $126,688 $41,868  44.1%

    Commercial real estate loans

      15,080  11,769  3,311  3.5%

    Total whole loan portfolio

     $183,636  138,457  45,179  47.6%

    Investment securities

      
     
      
     
      
     
      
     
     

    RMBS

     $76,992 $39,705 $37,287  39.3%

    U.S. Treasury bills

      
    184,943
      
    184,386
      
    557
      
    0.6

    %

    Total securities

      261,935  224,091  37,844  39.9%

    Total investment portfolio

     
    $

    445,571
     
    $

    362,548
     
    $

    83,023
      
    87.5

    %

    Cash

     
    $

    7,413
     
    $

     
    $

    7,413
      
    7.8

    %

    Other assets/(other liabilities)

      4,427    4,427  4.7%

    Total

     $457,411 $362,548 $94,863  100.0%

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    Residential Mortgage Loans

              The following table provides additional information on the non-QM loans in our portfolio as of December 31, 2020 (dollars in thousands).

     
     Portfolio Range Portfolio
    Weighted
    Average

    Unpaid principal balance

     $32 - $2,357 $489

    Interest rate

     3.88% - 10.75% 5.95%

    Maturity date

     11/2048 - 1/2061 10/2050

    FICO score at loan origination

     500 - 811 733

    LTV at loan origination

     5% - 90% 74.9%

    DTI at loan origination

     3% - 50% 35.3%

    Percentage of first lien loans

     N/A 99.9%

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

     N/A 10.7%

              The following table provides additional information on the non-QM loans in our portfolio as of December 31, 2019 (dollars in thousands).

     
     Portfolio Range Portfolio
    Weighted
    Average

    Unpaid principal balance

     $25 - $3,000 $733

    Interest rate

     3.88% - 10.75% 6.07%

    Maturity date

     12/2033 - 12/2059 11/2049

    FICO score at loan origination

     506 - 841 714

    LTV at loan origination

     6% - 95% 74.7%

    DTI at loan origination

     1.7% - 69.4% 29%

    Percentage of first lien loans

     N/A 99%

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

     N/A 0.8%

              The following charts illustrate additional characteristics of the non-QM loans in our portfolio that we owned directly as of December 31, 2020 and 2019, based on the product profile, borrower profile and geographic location (percentages are based on the aggregate unpaid principal balance of such loans).

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    Characteristics of Our Non-QM Loans (as of December 31, 2020)

    GRAPHIC


    (1)
    No state in "Other" represents more than a 4% concentration of the non-QM loans in our portfolio that we owned directly as of December 31, 2020.


    Characteristics of Our Non-QM Loans (as of December 31, 2019)

    GRAPHIC


    (1)
    No state in "Other" represents more than a 4% concentration of the non-QM loans in our portfolio that we owned directly as of December 31, 2019.

    Commercial Real Estate Loans

              The following table provides additional information on the commercial real estate loans in our portfolio as of December 31, 2020 (dollars in thousands).

     
     Portfolio Range Portfolio
    Weighted
    Average

    Unpaid principal balance

     $77 - $4,300 $646

    Interest rate

     5.66% - 8.38% 6.58%

    Remaining loan term

     2.42 - 29.2 years 14.3 years

    LTV at loan origination

     38.6% - 75.0% 54.7%

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              The following table provides additional information on the commercial real estate loans in our portfolio as of December 31, 2019 (dollars in thousands).

     
     Portfolio Range Portfolio
    Weighted
    Average

    Unpaid principal balance

     $109 - $3,103 $1,620

    Interest rate

     6.75% - 8.88% 7.51%

    Loan term

     15 - 30 years 28.9 years

    LTV at loan origination

     38.6% - 80.0% 67.7%

              The following charts illustrate the geographic location of the commercial real estate loans in our portfolio that we owned directly as of December 31, 2020 and 2019 (percentages are based on the aggregate unpaid principal balance of such loans).


    Geographic Diversification of Our Commercial Real Estate Loans (as of December 31, 2020)

    GRAPHIC


    Geographic Diversification of Our Commercial Real Estate Loans (as of December 31, 2019)

    GRAPHIC


    (1)
    No state in "Other" represents more than a 4% concentration of the commercial real estate loans in our portfolio that we owned directly as of December 31, 2019.

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    RMBS

              As described above under "— Liquidity and Capital Resources — Description of Existing Financing Arrangements — Securitization Transactions," in March 2019, we participated in a securitization transaction pursuant to which we contributed to AOMT 2019-2 non-QM loans with a carrying value of approximately $255.7 million that we had accumulated and held on our balance sheet. The remaining non-QM loans that we contributed to AOMT 2019-2 were purchased from affiliated and unaffiliated entities. We received bonds from AOMT 2019-2 with a fair value of approximately $55.8 million, including approximately $33.0 million in Risk Retention Securities (representing 5% of each class of the bonds issued as part of the transaction). Additionally, in July 2019, we participated in a second securitization transaction pursuant to which we contributed to AOMT 2019-4 non-QM loans with a carrying value of approximately $147.4 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2019-4 with a fair value of approximately $16.8 million. Furthermore, in November 2019, we participated in a third securitization transaction pursuant to which we contributed to AOMT 2019-6 non-QM loans with a carrying value of approximately $104.3 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2019-6 with a fair value of approximately $10.7 million. In June 2020, we participated in a fourth securitization transaction pursuant to which we contributed to AOMT 2020-3 non-QM loans with a carrying value of approximately $482.9 million that we had accumulated and held on our balance sheet. The remaining non-QM loans that we contributed to AOMT 2020-3 were purchased from an affiliated entity. We received bonds from AOMT 2020-3 with a fair value of approximately $66.5 million, including approximately $23.0 million in horizontal Risk Retention Securities (representing 5% of the fair value of the securities and other interests issued as part of the transaction).

              Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is shown below as of December 31, 2020 (dollars in thousands):

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

    UPB of loans

     $337,323 $344,129 $379,535 $442,314 

    Number of loans

      1,049  1,031  1,262  1,189 

    Weighted average loan coupon

      7.01% 6.99% 6.47% 5.86%

    Average loan amount

     $331 $340 $307 $381 

    Weighted average LTV at loan origination and deal date

      78.3% 77.7% 75.0% 74.3%

    Weighted average credit score at loan origination and deal date

      712  707  715  721 

    Current 3-month CPR

      31.6% 27.4% 32.3% 28.8%

    90+ day delinquency (as a % of UPB)

      15.9% 15.7% 11.2% 2.43%

    Fair value of first loss piece(1)

     $12,897 $3,415 $2,029 $23,507 

    Investment thickness(2)

      10.0% 4.5% 3.3% 6.8%

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

    (2)
    Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization.

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              Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is shown below as of December 31, 2019, unless otherwise stated (dollars in thousands):

     
     AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 

    UPB of loans

     $498,363 $497,973 $527,247 

    Number of loans

      1,489  1,416  1,678 

    Weighted average loan coupon

      6.97% 7.06% 6.57%

    Average loan amount

     $335 $351 $314 

    Weighted average LTV at loan origination and deal date

      78.1% 77.4% 75.2%

    Weighted average credit score at loan origination and deal date

      712  707  718 

    Current 3-month CPR

      32.0% 22.9% N/A 

    90+ day delinquency (as a % of UPB)

      1.8% 0.7% 0.0%

    Fair value of first loss piece(1)

     $13,108 $3,930 $2,139 

    Investment thickness(2)

      7.0% 4.5% 3.3%

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

    (2)
    Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization.

              The following table provides certain information with respect to our RMBS portfolio received in AOMT securitization transactions and acquired from other third parties as of December 31, 2020 (dollars in thousands):

     
     RMBS Repurchase Debt Allocated Capital 
     
     AOMT Third
    Party
    RMBS
     Total AOMT Third
    Party
    RMBS
     Total AOMT Third
    Party
    RMBS
     Total 

    RMBS

                                

    Senior

     $11,477 $6,820 $18,297 $11,936 $ $11,936 $(459)$6,820 $6,361 

    Mezzanine

      2,207    2,207  1,633    1,633  574    574 

    Subordinate

      78,830  18,784  97,614  15,104    15,104  63,726  18,784  82,510 

    Interest only/excess

      31,818    31,818        31,818    31,818 

    Total RMBS

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

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              The following table provides certain information with respect to the RMBS we received in connection with the AOMT 2019-2, AOMT 2019-4 and AOMT 2019-6 securitization transactions as of December 31, 2019 (dollars in thousands) as we did not own RMBS issued by other third parties as of December 31, 2019:

     
     Real Estate Securities Repurchase Debt Allocated Capital 
     
     AOMT
    2019-2
     AOMT
    2019-4
     AOMT
    2019-6
     AOMT
    2019-2
     AOMT
    2019-4
     AOMT
    2019-6
     AOMT
    2019-2
     AOMT
    2019-4
     AOMT
    2019-6
     

    RMBS

                                

    Senior

     $19,060 $ $ $17,596 $ $ $1,464 $ $ 

    Mezzanine

      2,237      1,761      476     

    Subordinate

      15,403  10,365  5,911  9,665  6,756  3,927  5,738  3,609  1,984 

    Interest only/excess

      10,397  7,882  5,737        10,397  7,882  5,737 

    Total RMBS

     $47,098 $18,246 $11,648 $29,022 $6,756 $3,927 $18,075 $11,491 $7,721 

              The following table sets forth information with respect to changes in fair value of our investments in RMBS for the year ended December 31, 2020 (dollars in thousands):

     
     RMBS  
     
     
     Senior Mezzanine Subordinate Interest Only Total 

    Beginning fair value

     $19,060 $2,237 $31,679 $24,016 $76,992 

    Acquisitions

                    

    AOMT securitizations participated in

          40,380  26,140  66,520 

    Secondary market purchases of AOMT securities

          5,663    5,663 

    Third-party securities

      6,880    18,098    24,978 

    Effect of principal payments

      (7,709)   (2,377)   (10,086)

    IO and excess servicing prepayments

            (9,672) (9,672)

    Change in fair value, net

      65  (30) 4,171  (8,666) (4,460)

    Ending fair value

     $18,297 $2,207 $97,614 $31,818 $149,935 

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

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    Geographic Diversification of Loans Underlying Our Portfolio
    of RMBS Issued in AOMT Securitization Transactions
    (as of December 31, 2020)

    GRAPHIC


    (1)
    No state in "Other" represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2020.

              The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2019 (percentages are based on the aggregate unpaid principal balance of such loans).

    GRAPHIC

    (1)
    No state in "Other" represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2019.

    CMBS

              As described above under "—Liquidity and Capital Resources—Description of Existing Financing Arrangements—Securitization Transactions," in November 2020, we participated in a securitization transaction of a pool of small balance commercial real estate loans consisting of mortgage loans secured by commercial properties pursuant to which we contributed to AOMT 2020-SBC1 commercial real estate loans with a carrying value of approximately $32.5 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2020-SBC1 with a fair value of approximately $8.9 million.

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              Certain information regarding the commercial real estate loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of December 31, 2020 (dollars in thousands):

     
     AOMT
    2020-SBC1
     

    UPB of loans

     $179,789 

    Number of loans

      234 

    Weighted average loan coupon

      7.44%

    Average loan amount

     $768 

    Weighted average LTV at loan origination and deal date

      62.3%

              The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of December 31, 2020 (dollars in thousands):

     
     CMBS Repurchase Debt Allocated Capital 

    CMBS

              

    Senior

     $ $ $ 

    Mezzanine

           

    Subordinate

      5,766    5,766 

    Interest only/excess

      3,031    3,031 

    Total CMBS

     $8,797 $ $8,797 

    Contractual Obligations and Commitments

              The following table summarizes our future estimated cash payments under existing contractual obligations as of December 31, 2020 (dollars in thousands).