Adamas Trust, Inc. Q3 FY2026 earnings call

• Market Environment: The quarter was characterized by sharp interest rate volatility, widening mortgage spreads, and a Fed rate hike, with the 10-year Treasury rising to ~5.29%. This created one of the most challenging environments for agency mortgages in years.
• Book Value Decline: Adjusted book value declined 19.6% to $8.88 per share due largely to unrealized mark-to-market losses on Agency RMBS holdings, driven by negative convexity and duration gap risks.
• Liquidity Strength: Available cash increased 42% to $259 million, with total excess liquidity capacity reaching $447 million, preserving financial flexibility.
• Risk Management Actions: Established a strategic $2.9 billion short TBA position to protect against spread widening and convexity risk; this position contributed positively to book value and has since been reduced by ~76% as volatility receded.
• Credit Performance: Residential credit remains solid with BPL rental delinquencies at a low 1.4%. Non-QM AAA spreads widened but securitization markets remained open.
• Constructive Origination: Constructive originated $406 million of loans (84% in BPL rental), with Adamus purchasing 57% of production. All originations were subject to investor purchase arrangements to mitigate rate risk.
• Portfolio Recovery: Early Q4 shows an approximate 4% rebound in adjusted book value as market conditions normalize and TBA shorts are removed.

The transcript does not provide a breakdown of financial performance by distinct product segments in terms of absolute revenue contribution percentages. However, it highlights that the decline in Adjusted Book Value was primarily driven by the Agency RMBS portfolio, which accounted for 78% of the book value decline. Specific income metrics provided include: Agency-adjusted Net Interest Income (NII) grew to $39.3 million (up 7%); Single Family Credit adjusted NII grew to $21.3 million (up 4% from Q2); and Total Adjusted NII increased to $51.5 million. Constructive Mortgage Banking Income was $10.9 million.

• Dividend Maintenance: Maintained quarterly dividend at $0.30 per share, marking the seventh consecutive quarter where Earnings Available for Distribution (EAD) covered the dividend.
• Investment Returns: Management sees compelling investment opportunities exceeding the 13.5% dividend yield, targeting mid-to-high teens returns in core strategies without aggressive leverage.
• Capital Deployment: Expect initial capital growth through the Agency channel as TBA shorts are removed, followed by a more balanced allocation between Agencies and Credit (specifically BPL Rental) in Q4.
• Leverage Normalization: Plan to return economic recourse leverage to levels seen in prior quarters (pre-Q3 reduction) as tail risks recede and TBA positions are closed.

• Interest Rate Volatility: Sharp moves in rates and volatility indices significantly impacted portfolio valuations, particularly due to negative convexity in higher coupon Agency pools.
• Spread Widening Feedback Loop: A feedback loop of high volatility leading to wider spreads, reduced demand, and further spread widening pressured asset prices.
• Geopolitical and Macroeconomic Factors: Prolonged Iran conflict and elevated energy prices contributed to inflation and monetary policy uncertainty, driving rate hikes.
• Legacy Credit Issues: An isolated legacy borrower relationship associated with pre-acquisition Constructive loans required additional reserves, though management views this as non-recurring.
• Refinancing Risk: High mortgage rates (>7%) leave virtually all outstanding borrowers out-of-the-money to refinance, potentially impacting future liquidity or default risks if housing markets soften.

Q: Analyst asked about the timing of the book value decline relative to TBA short additions and how the hedge book is positioned now that shorts are largely removed. / A: Nick Mah explained that while TBA shorts were added in September, duration re-hedging occurred throughout Q3. The shorts were removed because tail risk for spread/convexity declines has lessened, the 10-year Treasury has moderated, and forced selling by leveraged players has dissipated. However, the company maintains a tighter duration gap than mid-Q3 due to unresolved geopolitical factors (Iran conflict), higher oil prices, and potential midterm election volatility. They continue using futures and macro hedges dynamically.

Q: Analyst asked how the company views capital deployment given current spreads and what leverage levels they expect. / A: Nick Mah stated that core strategies offer attractive mid-to-high teen returns. Capital will initially deploy into Agencies as TBA shorts are unwound, returning to normal allocation levels. Over time, deployment will balance between Agencies and Credit (BPL Rental). While BPL Rental offers attractive returns, deployment may take longer due to challenges in mortgage originations, whereas Agencies can be scaled up faster via TBA mechanics.

Q: Analyst asked about the wider pricing (67 bps) of the October BPL rental securitization compared to Q3, questioning if it was due to spread widening or deal mix. / A: Nick Mah clarified that the majority of the differential was due to baseline rate increases rather than spread widening. On a net financing spread perspective, the deal was only slightly wider (159 bps). He emphasized that securitization markets remain functional and Adamus benefits from investor recognition of their program’s historical performance and prepayment protection features.

Q: Analyst asked about leverage capacity given the book value decline and requested details on the 'one-off' repurchase reserve taken on legacy Constructive loans. / A: Jason Serrano explained that leverage was purposefully reduced from 8.3x to 5.9x to manage intensifying risks in late September. With TBA shorts removed, they expect to return to previous leverage levels and portfolio sizes, supported by strong liquidity. Kristine Nario addressed the reserve, attributing it to an isolated legacy borrower relationship from before the Constructive acquisition. Approximately $1.5 million of a $2.5 million indemnification holdback was used, leaving $1 million remaining. She confirmed no broader issues with Constructive's current production were evident.