Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2025 (Unaudited)
NOTE 3. RISKS ASSOCIATED WITH PORTFOLIO ASSETS – (continued)
fixed but are declared at the discretion of the issuer. Common stock generally represents the riskiest investment in a company. In addition, common stock generally has the greatest appreciation and depreciation potential because increases and decreases in earnings are usually reflected in a company’s stock price. The Fund may also invest in preferred stock. Preferred stock is a class of stock having a preference over common stock as to the payment of dividends and the recovery of investment should a company be liquidated, although preferred stock is usually junior to the debt securities of the issuer. Preferred stock typically does not possess voting rights and its market value may change based on changes in interest rates.
The fundamental risk of investing in stock is the risk that the value of the stock might decrease. Stock values fluctuate in response to the activities of an individual company or in response to general market and/or economic conditions. Historically, common stocks have provided greater long-term returns and have entailed greater short-term risks than preferred stocks, fixed-income, and money market investments. The market values of all securities, including common and preferred stocks, is based upon the market’s perception of value and not necessarily the book value of an issuer or other objective measures of a company’s worth. If you invest in the Fund, you should be willing to accept the risks of the stock market (to the extent that a Fund invests in common stock) and should consider an investment in the Fund only as a part of your overall investment portfolio.
The Fund may invest in warrants. Warrants are securities, typically issued with preferred stock or bonds that give the holder the right to purchase a given number of shares of common stock at a specified price and time. The price of the warrant usually represents a premium over the applicable market value of the common stock at the time of the warrant’s issuance. Warrants have no voting rights with respect to the common stock, receive no dividends and have no rights with respect to the assets of the issuer. Investments in warrants involve certain risks, including the possible lack of a liquid market for the resale of the warrants, potential price fluctuations due to adverse market conditions or other factors and failure of the price of the common stock to rise. If the warrant is not exercised within the specified time period, it becomes worthless.
The Fund may invest in convertible securities which are preferred stocks or bonds that pay a fixed dividend or interest payment and are convertible into common stock or other equity interests at a specified price or conversion ratio during a specified period. Although convertible bonds, convertible preferred stocks, and other securities convertible into equity securities may have some attributes of income securities or debt securities, the Fund generally treats such securities as equity securities. By investing in convertible securities, the Fund may seek income, and may also seek the opportunity, through the conversion feature, to participate in the capital appreciation of the common stock or other interests into which the securities are convertible, while potentially earning a higher fixed rate of return than is ordinarily available in common stocks. While the value of convertible securities depends in part on interest rate changes and the credit quality of the issuers, the value of these securities will also change based on changes in the value of the underlying stock. Income paid by a convertible security may provide a limited cushion against a decline in the price of the security; however, convertible securities generally have less potential for gain than common stocks. Also, convertible bonds generally pay less income than non-convertible bonds.
Developments such as public health crises, armed conflict, changing interest rates, inflation, supply chain disruptions, geopolitical risks, natural or environmental disasters, economic sanctions, and tariffs may disrupt economic markets and the prolonged economic impacts of these types of developments are uncertain. The operational and financial performance of the issuers of securities in which the Fund invests depends on future developments, including the duration, spread, and conclusion of global events, and such uncertainty may in turn impact the value of the Fund’s investments.
NOTE 4. FUND CERTIFICATION
The Fund is listed for trading on the NYSE and has filed with the NYSE its annual chief executive officer certification regarding compliance with the NYSE’s listing standards. The Fund filed with the Securities and Exchange Commission (“SEC”) the certification of its chief executive officer and principal financial officer required by Section 302 of the Sarbanes-Oxley Act.
22
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2025 (Unaudited)
NOTE 5. DERIVATIVE TRANSACTIONS
Balance Sheet Offsetting Information
During the ordinary course of business, the Fund may enter into transactions subject to enforceable netting agreements or other similar arrangements (“netting agreements”). Generally, the right to offset in netting agreements allows the Fund to offset any exposure to a specific counterparty with any collateral received or delivered to that counterparty based on the terms of the agreement. Generally, the Fund manages its cash collateral and securities collateral on a counterparty basis. As of July 31, 2025, the Fund was not subject to any netting agreements.
The following table provides a summary of offsetting financial liabilities and derivatives and the effect of derivative instruments on the Statement of Assets and Liabilities as of July 31, 2025:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Gross Amounts Not Offset in Statement of Assets and Liabilities |
| |
|
Gross Amounts of
Recognized Liabilities |
|
Gross Amounts Offset in
Statement of |
|
Liabilities Presented in
Statement of |
|
|
|
|
|
|
| Reverse Repurchase Agreements |
|
($35,436,000) |
|
$– |
|
($35,436,000) |
|
($35,436,000) |
|
$– |
|
$– |
In some instances, the actual collateral received/pledged may be more than the amounts disclosed herein.
NOTE 6. FEES AND OTHER RELATED PARTY TRANSACTIONS
Under the terms of the investment advisory agreement, on behalf of the Fund (the “Agreement”), the Adviser manages the Fund’s investments subject to oversight of the Trustees. From February 1, 2025, through May 31, 2025, as compensation for its management services, the Fund was obligated to pay the Adviser a fee computed and accrued daily and paid monthly at an annual rate of 1.35% of the average daily Managed Assets of the Fund. Effective June 1, 2025, the Adviser elected to voluntarily limit the Fund’s management fee to 1.00% of the average daily Managed Assets of the Fund for a six month period. These fees are included in the Investment Advisory line item that is reflected in the Statement of Operations. Managed Assets includes total assets (including any assets attributable to borrowing for investment purposes) minus the sum of the Fund’s accrued liabilities (other than liabilities representing borrowings for investment purposes) (“Managed Assets”).
The Adviser has also contractually agreed to waive its fees and/or reimburse certain expenses (exclusive of any management fees, front-end sales loads, taxes, interest expenses, dividend and interest expenses related to short sales, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization, any transaction-related expenses and fees arising out of transactions effected on behalf of the Fund, litigation and potential litigation expenses, and other extraordinary expenses not incurred in the ordinary course of the Fund’s business) to limit the Fund’s Total Annual Fund Operating Expenses to 0.25% of the Fund’s Managed Assets (the “Expense Limit”) through at least May 31, 2026 (the “Limitation Period”). The Expense Limit may be eliminated at any time by the Board, on behalf of the Fund, upon 60 days’ written notice to the Adviser. Prior to the end of the Limitation Period, the Expense Limit may not be terminated by the Adviser without the consent of the Board of Trustees. The Expense Limit is subject to repayment by the Fund within 36 months following the month in which that particular waiver and/or reimbursement occurred, provided that the Fund is able to make the repayment without exceeding the expense limit described above or the expense limitation in effect at the time of the reimbursement (whichever is lower). During the period ended July 31, 2025, the Fund waived $272,787 of expenses and repaid $140,938 of previously waived expenses to the Adviser. Additionally, during the period ended July 31, 2025, the Adviser voluntarily waived $342,267 of the Fund’s management fees. Fees waived under this voluntary waiver are not subject to recoupment by the Adviser. The amounts subject to repayment by the Fund, pursuant to the aforementioned conditions at July 31, 2025, are included in the table below.
|
|
|
|
|
|
|
|
|
|
|
Total Waived
Expenses
Recoverable
by the Adviser
as of 07/31/25 |
|
Recoverable
Expenses Subject to
36 Month Limit
During the Year
Ending 01/31/28 |
|
Recoverable
Expenses Subject to
36 Month Limit
During the Year
Ending 01/31/29 |
$314,579 |
|
|
|
$41,792 |
|
|
|
|
$272,787 |
|
23
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2025 (Unaudited)
NOTE 6. FEES AND OTHER RELATED PARTY TRANSACTIONS – (continued)
Destra Capital Advisors LLC (“Destra”) provides investor support services in connection with the ongoing operation of the Fund. Such services include providing ongoing contact with respect to the Fund and its performance with financial advisors that are representatives of financial intermediaries, and communicating with the NYSE specialist for the shares of the Fund, and with the
closed-end
fund analyst community regarding the Fund on a regular basis. The Fund pays Destra a service fee in an annual amount equal to 0.07% of the average daily value of the Fund’s Managed Assets. This fee is included in the Service Fees line item that is reflected in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Fund Services”), an indirect wholly-owned subsidiary of U.S. Bancorp, serves as the Fund’s Administrator (“Administrator”) and, in that capacity, performs various administrative and accounting services for the Fund. Fund Services also serves as the Fund’s fund accountant and transfer agent. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Fund’s custodian; coordinates the preparation and payment of the Fund’s expenses and reviews the Fund’s expense accruals. As compensation for its services, the Administrator is entitled to a monthly fee at an annual rate based upon the average daily net assets of the Fund. U.S. Bank, N.A. (the “Custodian”) serves as custodian to the Fund. These fees are included in the Fund accounting, Transfer agent, Administration, and Custodian line items that are reflected in the Statement of Operations.
The Fund makes reimbursement payments to the Adviser for the salary associated with the Chief Compliance Officer. The compliance fees expensed by the Fund during the period ended July 31, 2025, are included in the Compliance line item that is reflected in the Statement of Operations.
Certain officers, Trustees and shareholders of the Fund are also owners or employees of the Adviser. Each Trustee who is not an “interested person” as defined in the 1940 Act (i.e., an “Independent Trustee”) of the “Fund Complex” (which includes the Fund, as well as each series of Angel Oak Funds Trust, Angel Oak Strategic Credit Fund, and Angel Oak Credit Opportunities Term Trust, affiliated registrants not disclosed in this report) an annual retainer of $75,000 (pro-rated for any periods less than one year) paid quarterly as well as $12,000 for attending each regularly scheduled meeting in connection with his or her service on the Board of the Fund Complex. In addition, each Committee Chair receives additional annual compensation of $12,000 (pro-rated for any periods less than one year), and the Chair of the Board receives an additional $17,000. Independent Trustees are eligible for reimbursement of out-of-pocket expenses incurred in connection with attendance at meetings. For the period ended July 31, 2025, the aggregate compensation paid to the Independent Trustees by the Fund Complex was $278,500. The Fund’s allocated portion of the trustee compensation is included in the Trustee line item that is reflected in the Statement of Operations.
NOTE 7. INVESTMENT TRANSACTIONS
For the period ended July 31, 2025, purchases and sales of investment securities, other than short-term investments and short-term U.S. Government securities, were as follows:
For the period ended July 31, 2025, there were no long-term purchases or long-term sales of U.S. Government securities for the Fund.
NOTE 8. FEDERAL TAX INFORMATION
The tax characterization of distributions paid for the latest tax year ended January 31, 2025, and January 31, 2024, were as follows:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Distributions paid from: |
|
|
|
|
|
|
|
|
Ordinary Income |
|
|
$18,031,085 |
|
|
$ |
17,813,675 |
|
Net Long-Term Capital Gain |
|
|
– |
|
|
|
– |
|
Return of Capital |
|
|
14,750,846 |
|
|
|
12,512,118 |
|
Total |
|
|
$32,781,931 |
|
|
$ |
30,325,793 |
|
24
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2025 (Unaudited)
NOTE 8. FEDERAL TAX INFORMATION – (continued)
As of the latest tax year ended January 31, 2025, the components of distributable earnings (accumulated deficit) on a tax basis were as follows:
|
|
|
| |
|
|
Tax Cost of Investments |
|
$505,651,935 |
Unrealized Appreciation* |
|
6,804,507 |
Unrealized Depreciation* |
|
(35,945,478) |
Net Unrealized Appreciation (Depreciation)* |
|
($29,140,971) |
Undistributed Ordinary Income |
|
– |
Undistributed Long-Term Gain (Loss) |
|
– |
Accumulated Gain (Loss) |
|
$– |
Other Accumulated Gain (Loss) |
|
(17,174,926) |
Total Distributable Earnings (Accumulated Deficit) |
|
($46,315,897) |
| * |
Represents aggregated amounts of investments and reverse repurchase agreements in the Fund. |
The temporary differences between book basis and tax basis in the Fund are primarily attributable to amortization of callable bonds and preferred stock basis adjustments.
As of the latest tax year ended January 31, 2025, the Fund had available for federal tax purposes an unused capital loss carryforward of $17,169,544. For the latest tax year ended January 31, 2025, the Fund did not utilize any capital loss carryforwards.
To the extent these carryforwards are used to offset futures gains, it is probable that the amount offset will not be distributed to shareholders. The carryforward expires as follows:
|
|
|
| |
|
|
No expiration short-term |
|
$11,263,439 |
No expiration long-term |
|
$5,906,105 |
Total |
|
$17,169,544 |
Certain capital losses incurred after October 31 and within the current taxable year, are deemed to arise on the first business day of the Fund’s following taxable year. For the latest tax year ended January 31, 2025, the Fund did not defer any post-October losses.
NOTE 9. SENIOR NOTES
On July 8, 2021, the Fund issued senior unsecured notes (“Notes”) in an aggregate amount of $85,000,000 in two fixed-rate series. The Notes were issued in private placement offerings to institutional investors and are not listed on any exchange or automated quotation system. The note purchase agreement (the “Agreement”) contains various covenants related to other indebtedness and limits on the Fund’s overall leverage. Under the 1940 Act and the terms of the Notes, the Fund may not declare dividends or make other distributions on shares of its common stock or make purchases of such shares if, at any time of the declaration, distribution or purchase, asset coverage with respect to senior securities representing indebtedness (including the Notes) would be less than 300%.
The table below sets forth a summary of the key terms of each series of Notes outstanding at July 31, 2025.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Outstanding
01/31/25 |
|
|
|
Unamortized
Offering Costs |
|
|
|
|
|
|
A |
|
$40,000,000 |
|
Semi-Annual |
|
$159,107 |
|
$38,774,413 |
|
2.35% |
|
July 8, 2026 |
B |
|
$45,000,000 |
|
Semi-Annual |
|
$179,418 |
|
$41,799,307 |
|
2.80% |
|
July 8, 2028 |
The average daily balance of senior notes outstanding for the Fund during the period ended July 31, 2025, was $85,000,000 at a weighted average daily interest rate of 2.59%.
25
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2025 (Unaudited)
NOTE 9. SENIOR NOTES – (continued)
The carrying value of the Notes on the Statement of Assets and Liabilities is equal to the principal amount of the Notes less unamortized offering costs. The estimated fair value of the notes was calculated, for disclosure purposes, based on estimated market yields for comparable debt instruments with similar maturity and terms. The Fund would categorize the Senior Notes as Level 2 in the fair value hierarchy.
The Fund shall at all times maintain a current rating given by a Nationally Recognized Statistical Rating Organization (“NRSRO”) of at least Investment Grade with respect to the Notes and shall not at any time have any rating given by a NRSRO of less than Investment Grade with respect to the Notes. The Notes have been assigned an ‘A1’ long-term rating by Moody’s Investors Service.
The aggregate accrued interest payable on the Notes as of July 31, 2025, was $140,556 and is included in the Interest Payable for senior notes line item in the Statement of Assets and Liabilities. The Fund paid an origination fee of $854,000 and other expenses on July 13, 2021, which was paid upfront and is being amortized for daily over the life of the Notes. During the period ended July 31, 2025, $1,203,998 of interest expense and amortization of origination fees were included in the Interest and commissions expense line item that is reflected in the Statement of Operations.
At July 31, 2025, the Fund was in compliance with all covenants under the Agreement.
NOTE 10. CAPITAL TRANSACTIONS
The Board approved a rights offering to participating shareholders of record as of September 20, 2021, which were in turn allowed to subscribe for new common shares of the Fund. Record date shareholders received one right for each common share held on the record date. For every three rights held, a holder of the rights was entitled to buy one new common share of the Fund. Record date shareholders who fully exercised all rights initially issued to them in the primary subscription were entitled to buy those common shares that were not purchased by other record date shareholders. The subscription price per common share (the “Subscription Price”) was determined based on a formula equal to 92.5% of the average of the last reported sales price of a common share of the Fund on the NYSE on the layoff/expiration dates and each of the four immediately preceding trading days (the “Formula Price”). However, the Formula Price was less than 86% of the Fund’s NAV per common share at the close of trading on the NYSE on the layoff/expiration dates, therefore the Subscription Price used was based on 86% of the Fund’s NAV per common share at the close of trading on the NYSE on those days. Offering costs were charged to paid-in-capital upon the exercise of the rights.
The shares of common stock issued, subscription price, and offering costs for the rights offering were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 6, 2021 |
|
410,000 |
|
$16.15 |
|
$37,920 |
October 11, 2021 |
|
300,000 |
|
$16.10 |
|
$27,746 |
October 14, 2021 |
|
4,366,333 |
|
$16.06 |
|
$403,834 |
Additionally, the Board approved a rights offering to participating shareholders of record as of April 21, 2025, which were in turn allowed to subscribe for new common shares of the Fund. Record date shareholders received one right for each common share held on the record date. For every three rights held, a holder of the rights was entitled to buy one new common share of the Fund. Record date shareholders who fully exercised all rights initially issued to them in the primary subscription were entitled to buy those common shares that were not purchased by other record date shareholders. The Subscription Price per common share was determined based on a formula equal to 94% of the average of the last reported sales price of a common share of the Fund on the NYSE on the layoff/expiration dates and each of the four immediately preceding trading days. However, the Formula Price was less than 90% of the Fund’s NAV per common share at the close of trading on the NYSE on the layoff/expiration dates, therefore the Subscription Price used was based on 90% of the Fund’s NAV per common share at the close of trading on the NYSE on those days. Offering costs were charged to paid-in-capital upon the exercise of the rights.
26
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2025 (Unaudited)
NOTE 10. CAPITAL TRANSACTIONS – (continued)
The shares of common stock issued, subscription price, and offering costs for the rights offering were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 12, 2025 |
|
473,750 |
|
$12.97 |
|
$32,635 |
May 14, 2025 |
|
7,880,463 |
|
$13.23 |
|
$542,851 |
NOTE 11. ACCOUNTING PRONOUNCEMENTS AND/OR REGULATORY UPDATES
The Fund has one reportable segment. Business activities are managed on a consolidated basis and revenues are derived primarily through the Fund’s investments in accordance with its investment objective. The Fund’s Chief Operating Decision Maker (“CODM”) is the Principal Financial Officer, Chief Investment Officer, Head of Portfolio Management - Public Strategies, and the Risk Committee. The CODM assesses performance based on the Fund’s Total Return as reported in the Financial Highlights, and the same accounting policies are applied as described in the summary of significant accounting policies. The Fund’s Total Return is utilized by the CODM to compare results, including the impact of the Fund’s costs, to the Fund’s competitors and to the Fund’s benchmark index.
NOTE 12. SUBSEQUENT EVENTS
Management of the Fund has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date these financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments other than the following:
On August 25, 2025, the Fund announced that it filed a definitive proxy statement for a special meeting of shareholders on September 26, 2025, at which shareholders approved a new investment advisory agreement in connection with an anticipated change of control of the Adviser.
Additionally, effective October 1, 2025, Ward Bortz is expected to replace Adam Langley as President of the Fund.
27
Additional Information (Unaudited)
1. Shareholder Notification of Federal Tax Status
For the latest tax year ended January 31, 2025, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.80% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate the maximum amount allowable as taxed at a maximum rate of 23.80%.
For the latest tax year ended January 31, 2025, the Fund paid qualified dividend income of 0.00%.
For the latest tax year ended January 31, 2025, the percentage of ordinary income dividends paid by the Fund that qualifies for the dividends received deduction available to corporations was 0.00%.
For the latest tax year ended January 31, 2025, the Fund did not pay any ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871(k)2(c).
For the latest tax year ended January 31, 2025, the percentage of taxable ordinary income distributions that are designated as interest related dividends under Internal Revenue 871(k)1(c) was 89.53%.
2. Disclosure of Portfolio Holdings
The Fund will file a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Part F of Form
N-PORT.
The Fund’s Part F of Form
N-PORT
is available on the SEC’s website at
http://www.sec.gov
and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling
(800) SEC-0230.
3. Householding
The SEC permits funds to deliver only one copy of certain shareholder documents, including shareholder reports, to fund investors with multiple accounts at the same residential or post office box address. This practice is often called “householding” and it helps eliminate duplicate mailings to shareholders. Unless you have instructed the Fund otherwise, only one copy of a shareholder report will be mailed to multiple Fund shareholders of record who share the same mailing address. If you would like additional copies of a shareholder report, please contact your participating broker-dealer firm or other financial intermediary or, if you hold Fund shares directly with the Fund, you may write to the Fund c/o U.S. Bank Global Fund Services at P.O. Box 701, Milwaukee, WI 53201-0701 or call toll-free (855)751-4324.
4. Statement Regarding the Basis for the Approval of New Investment Advisory Agreement and Interim Investment Advisory Agreement
Pursuant to Section 15(c) of the Investment Company Act of 1940, as amended (the “1940 Act”), at a meeting held on April 23, 2025 (the “Special Board Meeting”), the Board of Trustees (the “Board”) of Angel Oak Financial Strategies Income Term Trust (the “Fund”) considered the approval of a new investment advisory agreement (the “New Investment Advisory Agreement”) between the Fund and Angel Oak Capital Advisors, LLC (the “Adviser” or “Angel Oak”). At the Special Board Meeting, the Board noted that Brookfield Asset Management Ltd. (“Brookfield”) was expected to acquire a majority of Angel Oak Companies, LP, the parent of Angel Oak Asset Management Holdings, LLC, itself the parent of Angel Oak (the “Transaction”) and, in turn, the closing of the Transaction would result in a change of control of Angel Oak (the “Change of Control”). Consistent with applicable requirements under the 1940 Act, the existing investment advisory agreement between Angel Oak and the Fund (the “Existing Investment Advisory Agreement”) contains a provision that the Existing Advisory Agreement will automatically terminate in the event of an “assignment” (as defined in the 1940 Act).
The relevant provisions of the 1940 Act specifically provide that it is the duty of the Board to request and evaluate such information as the Board determines is necessary to allow it to properly consider the approval of the New Investment Advisory Agreement, and it is the duty of the Adviser to furnish the Trustees with information that is responsive to their request. Accordingly, in determining whether to approve the New Investment Advisory Agreement between the Adviser and the Fund, the Board requested, and the Adviser and Brookfield provided, information and data relevant to the Board’s consideration. This included materials prepared by the Adviser, Brookfield and an independent third-party data provider (the “Outside Data Provider”) that provided the Board with information regarding the fees and expenses of the Fund, as compared to other similar closed-end funds. The Board also considered responses to Trustees’ questions at the Special Board Meeting.
28
With respect to the Transaction, the Board reviewed materials received from the Adviser and Brookfield, including information relating to the reasons for the Transaction and other information relating to Brookfield’s plans with respect to its majority ownership in the Adviser. The Board also reviewed information regarding Brookfield, including, but not limited to: (a) information regarding the new proposed ownership structure and any possible effect on shareholders; (b) the culture of Brookfield and its alignment with that of the Adviser; (c) the potential distribution arrangements that Brookfield may offer the Adviser and the Fund, particularly with institutional investors; (d) information regarding other similar transactions in which Brookfield has engaged; and (e) potential synergies and collaboration between the Adviser and Brookfield following the completion of the Transaction.
Following their review and consideration, the Trustees determined that the New Investment Advisory Agreement would enable shareholders of the Fund to obtain high quality services at a cost that is appropriate, reasonable, and in the best interests of the Fund and its shareholders. Accordingly, the Board, including those Trustees who are not considered to be “interested persons” of the Trust, as that term is defined in the 1940 Act (the “Independent Trustees”), unanimously approved the New Investment Advisory Agreement. In reaching their decision, the Trustees requested and obtained from the Adviser such information as they deemed reasonably necessary to evaluate the New Investment Advisory Agreement. The Trustees also carefully considered the profitability data and comparative fee and expense information prepared by the Adviser. In considering the New Investment Advisory Agreement with respect to the Fund, the Trustees evaluated a number of factors that they believed, in light of their reasonable business judgment, to be relevant. Before voting on the New Investment Advisory Agreement, the Independent Trustees reviewed the New Investment Advisory Agreement with independent legal counsel to the Independent Trustees and received a memorandum from independent legal counsel to the Independent Trustees discussing the legal standards for their consideration of the New Investment Advisory Agreement. The Trustees also discussed the New Investment Advisory Agreement with independent legal counsel in executive sessions at which no representatives of the Adviser or Brookfield were present. The Trustees based their decision on the following considerations, among others, although they did not identify any single specific consideration or any particular information that was controlling of their decision:
The nature, extent and quality of the advisory services to be provided.
The Trustees concluded that the Adviser is capable of providing high quality services to the Fund, as indicated by the nature and quality of services provided in the past to the Fund and other registered investment companies advised by the Adviser (the “Angel Oak Funds”), the Adviser’s management capabilities demonstrated with respect to the Fund, the professional qualifications and experience of each of the portfolio managers of the Fund, the Adviser’s investment and management oversight processes, and the competitive investment performance of the Fund. The Board noted that there would be no differences between the scope of services required to be provided by the Adviser under the Existing Investment Advisory Agreement and the scope of services required to be provided by the Adviser under the New Investment Advisory Agreement. The Board noted that the key investment and management personnel of the Adviser servicing the Fund are expected to remain with the Adviser following the Transaction. The Trustees also considered Brookfield’s representations to the Board that the Adviser would continue to provide investment and related services that were materially the same quality and quantity as services provided to the Fund in the past, and that these services are appropriate in scope and extent in light of the Fund’s operations, the competitive landscape of the investment company business and investor needs. On the basis of the Trustees’ assessment of the nature, extent and quality of the advisory services provided by the Adviser, the Trustees concluded that, under the New Investment Advisory Agreement, it was expected that the Adviser would continue to generate a level of long-term investment performance that is appropriate in light of the Fund’s investment objectives, policies and strategies and competitive with many other comparable investment companies.
The investment performance of
The Trustees concluded on the basis of information derived from independent third-party data that the Adviser had achieved investment performance that was competitive relative to the Fund’s category, as established by the Outside Data Provider (the “Category”), and a smaller peer group of comparable funds (the “Peer Group”) over short- and longer-term trailing periods. In considering the performance of the Fund, the Trustees reviewed reports comparing the Fund’s performance to: (i) its Peer Group; (ii) its Category; and (iii) its benchmark index.
The Trustees observed that the NAV of the Fund’s shares (which commenced operations in May 2019) had ranked in the first quartile of the Peer Group over the one- and three-year periods ended December 31, 2024, in the second quartile over the five-year period ended December 31, 2024, and in the third quartile over the period since the Fund’s inception. They noted that the market price of the Fund’s shares had ranked in the first quartile of the Peer Group over the one- and three-year periods ended December 31, 2024, and in the fourth quartile over the five-year period ended December 31, 2024 and since the Fund’s inception. The Trustees further noted that the NAV of the Fund’s shares had outperformed the Fund’s benchmark index, the Bloomberg U.S. Aggregate Bond Index, over the one-, three-, and five-year periods ended December 31, 2024, and for the period since the Fund’s inception.
Based on the representations made by Brookfield at the Special Board Meeting that the Adviser would continue to operate following the closing of the Transaction in much the same manner as it currently operates, the Board concluded that the
29
investment performance of the Adviser was not expected to be affected by the Transaction and the Adviser is capable of generating a level of long-term investment performance that is appropriate in light of the Fund’s investment objectives, policies and strategies and competitive with many other investment companies.
The cost of advisory services provided and the level of profitability.
On the basis of comparative information derived from the expense data provided to the Board, the Trustees determined that the Fund’s management fee was higher than the median management fees of its peer closed-end funds and that its net expense ratio was higher than the median of its peer closed-end funds. The Board noted that the quality of services provided by the Adviser and the relatively strong performance of the Angel Oak Funds demonstrated that the advisory fee still offered an appropriate value for the Fund and its shareholders. In addition, the Trustees noted that the Adviser had agreed to limit the operating expenses of the Fund through September 30, 2027, and had recently agreed to voluntarily waive 0.35% of the management fee paid by the Fund, resulting in a management fee of 1.00%, for six months beginning on June 1, 2025, in connection with the Fund’s offering of transferable subscription rights to acquire common shares that commenced on April 21, 2025.
The Board also reviewed the fees that the Adviser charges its other clients for discretionary portfolio management services, noting that the firm has a variety of account types with different fee arrangements, but none with similar investment objectives and strategies as the Fund. The Board considered the fee rates charged by the Adviser to manage such funds and accounts. The Board took into account the unique management requirements involved in managing a registered investment company as opposed to other types of funds and accounts.
The Board also reviewed detailed profitability information and considered the Adviser’s current level of profitability with respect to the Fund and noted that the Adviser’s profitability was acceptable and not excessive and consistent with applicable industry averages and that the Adviser is committed to using its own resources to help improve the services it provides for the benefit of the Fund. The Trustees also noted that the Adviser has provided information regarding its methodology for attributing profitability to the Fund, as opposed to its other lines of business. The Trustees also took into consideration the nature and extent of expenses that are borne directly by the Adviser from its own financial resources to help to market and promote the Fund. Accordingly, on the basis of the Board’s review of the fees to be charged by the Adviser for investment advisory services, the investment advisory and other services provided to the Fund by the Adviser, and the estimated profitability of the Adviser’s relationship with the Fund, the Board concluded that the level of investment advisory fees and the Adviser’s profitability are appropriate in light of the investment advisory fees, overall expense ratios and investment performance of comparable investment companies and the historical profitability of the relationship between the Fund and the Adviser. The Trustees considered the profitability of the Adviser both before and after the impact of the marketing-related expenses that the Adviser incurs out of its own resources in connection with its management of the Fund.
At the Special Board Meeting, the Trustees considered the fact that the fee rates payable to the Adviser would be the same under the Fund’s New Investment Advisory Agreement as they are under the Fund’s Existing Investment Advisory Agreement. The Trustees also noted that the Fund’s fee waiver/expense limitation agreements with the Adviser would remain in effect, if the New Investment Advisory Agreement is approved by shareholders and the Transaction is completed. With respect to anticipated profitability, the Trustees noted that it was too early to predict whether and to what extent the Transaction would affect the Adviser’s profitability with respect to the Fund, but noted that this matter would be given further consideration on an ongoing basis. Overall, the Trustees concluded that the fees to be paid under the New Investment Advisory Agreement are reasonable.
The extent to which economies of scale may be realized as the Fund grows and whether the advisory fee reflects possible economies of scale.
While it was noted that the Fund’s investment advisory fee under the Existing Investment Advisory Agreement and New Investment Advisory Agreement will not decrease as the Fund’s assets grow because the Fund is not subject to investment advisory fee breakpoints, the Trustees concluded that the Fund’s investment advisory fee was appropriate in light of the projected size of the Fund and appropriately reflects the current economic environment for the Adviser and the competitive nature of the closed-end fund market. The Trustees then noted that they would have the opportunity to periodically re-examine whether the Fund had achieved economies of scale and the appropriateness of the investment advisory fee payable to the Adviser with respect to the Fund, in the future, at which time the implementation of fee breakpoints on the Fund could be considered. The Trustees noted the past improvements made to the Adviser’s infrastructure and services provided to the Fund, which had been funded by the advisory fees received by the Adviser. Finally, the Trustees noted the Adviser’s statement that economies of scale could not be predicted in advance of the closing of the Transaction.
Benefits to the Adviser from its relationship with
(and any corresponding benefits to
The Trustees concluded that other benefits derived by the Adviser from its relationship with the Fund are reasonable and fair and consistent with industry practice and in the best interests of the Fund and its shareholders. The Trustees also considered the terms of the Transaction and the financial benefits that it brings to the current parent company of the Adviser and noted that those financial benefits are available, in part, because of the involvement of the Adviser in the Transaction. The Trustees also noted that the
30
Transaction is expected to place the Adviser on strong financial footing, enhancing its ability to provide continuous services to the Fund and that the Fund could benefit from the potential synergies and collaboration between the Adviser and Brookfield.
In approving the New Investment Advisory Agreement, the Trustees determined that the Adviser has made a substantial commitment to the recruitment and retention of high quality personnel, and maintains the financial, compliance and operational resources reasonably necessary to manage the Fund in a professional manner that is consistent with the best interests of the Fund and its shareholders and that that commitment was expected to remain in place after the Transaction. The Trustees also concluded that the Adviser has made a significant entrepreneurial commitment to the management and success of the Fund, which entails a substantial financial and professional commitment, including the Operating Expense Limitation Agreement under which the Adviser has undertaken to waive a portion of its fees to the benefit of Fund shareholders to the extent necessary in accordance with the terms of the Operating Expense Limitation Agreement. The Trustees observed that the waivers are subject to recoupment under the terms of the Operating Expense Limitation Agreement. The Adviser’s financial commitment to the Fund also included the payment of organizational, offering and distribution costs for the Fund when it was launched. The Board also considered matters with respect to the brokerage practices of the Adviser, including its best-execution procedures, and noted that these were reasonable and consistent with standard industry practice.
Following further discussion and the consideration of questions raised by the Independent Trustees, the Trustees determined that they had received sufficient information relating to the Fund in order to consider the approval of the New Investment Advisory Agreement. It was noted that, in making their determinations, the Trustees had considered and relied upon not only the materials provided to them for use at the Special Board Meeting, but also the information about the Fund and the Adviser that had been provided to them throughout the past year in connection with their regular Board meetings. In reaching their conclusion with respect to the approval of the New Investment Advisory Agreement and the level of fees paid under the New Investment Advisory Agreement, the Trustees did not identify any single factor as controlling, but, rather, the Board took note of a combination of factors that had influenced their decision-making process. They noted the level and quality of investment advisory services provided by the Adviser to the Fund, and they found that these services continued to benefit the Fund and its shareholders and also reflected management’s overall commitment to the continued growth and development of the Fund.
Because the Change of Control would result in the automatic termination of the Existing Investment Advisory Agreement, and in consideration of the possibility that approval of the New Investment Advisory Agreement by the Fund’s shareholders might not be obtained prior to the expiration of the Existing Investment Advisory Agreement, pursuant to Section 15(c) of the 1940 Act and Rule 15a-4 under the 1940 Act, at a meeting held on June 23-24, 2025, the Board considered the approval of an interim investment advisory agreement (the “Interim Investment Advisory Agreement”) between the Fund and the Adviser, which would take effect upon the expiration of the Existing Investment Advisory Agreement, provided that shareholder approval has not been obtained by that date, and which would expire on the earlier of (1) the closing of the Transaction and concurrent effectiveness of the New Investment Advisory Agreement or (2) 150 days following the effectiveness of the Interim Investment Advisory Agreement. In reaching their decision, the Trustees based their decision on the considerations described above in connection with their approval of the New Investment Advisory Agreement at the Special Board Meeting, among others, although they did not identify any single specific consideration or any particular information that controlled their decision. Accordingly, the Board, including the Independent Trustees, unanimously approved the Interim Investment Advisory Agreement.
5. Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio securities and information regarding how the Fund voted those proxies during the most recent twelve month period ended June 30, is available without charge upon request by (1) calling the Fund at (855)
751-4324
and (2) from Fund documents filed with the SEC on the SEC’s website at
www.sec.gov
.
6. Annual Meeting of Shareholders
At the Annual Meeting of Shareholders held on June 26, 2025, shareholders voted on a new Investment Advisory Agreement between the Fund and the Adviser. The proposal was not approved based on the following results:
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
To Approve the New Investment Advisory Agreement |
|
11,417,091 |
|
|
4,840,580 |
|
|
|
126,867 |
|
Shareholders also voted on the election of Keith M. Schappert and Andrea N. Mullins as Class II Trustees to the Board of Trustees to serve a three-year term expiring in 2028. The proposal was not approved based on the following results:
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
To Elect Keith M. Schappert |
|
9,045,421 |
|
|
1,056,841 |
|
|
|
132,174 |
|
To Elect Andrea N. Mullins |
|
9,071,006 |
|
|
1,030,778 |
|
|
|
132,652 |
|
31
