Adamas Trust (NASDAQ:ADAM) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Adamas Trust experienced a significant 19.6% decline in adjusted book value to $8.88 per share, driven by mark-to-market losses on agency RMBS holdings amidst interest rate volatility and widening mortgage spreads.
The company strengthened its liquidity position, ending the quarter with $259 million in available cash, a 42% increase from the prior quarter, and maintained excess liquidity capacity at $447 million.
Adamas Trust managed risk by strategically establishing a $2.9 billion short TBA position to protect against duration extension risk, which was reduced by 76% early in the fourth quarter.
Earnings available for distribution increased by 25% year-over-year to $0.30 per share, covering the quarterly dividend of the same amount, which was raised by 11% this quarter.
Despite a GAAP net loss of $171 million, adjusted net interest income grew to $51.5 million, supported by agency RMBS and BPL rental portfolios, with the company maintaining a strong earnings base.
The company sees attractive investment opportunities in its core strategies, expecting mid- to high-teens returns without reliance on aggressive leverage, and plans to leverage its liquidity to capitalize on market dislocations.
Adamas Trust’s credit portfolio remained stable with a low delinquency rate, and the company continued to avoid niche sectors, focusing on high-quality credit and prepayment protection.
Management remains optimistic about the outlook for agency RMBS, seeing current conditions as one of the most attractive entry levels in recent quarters.
Full Transcript
OPERATOR
All parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. If you have a question, please press the star followed by 11 on your touchtone phone. If you’d like to withdraw your question, please press star 11 again. If you’re using speaker equipment, we ask that you please lift the handset before making your selection. This conference is being recorded on Thursday, October 29, 2026. I would now like to turn the call over to Christy Masalem, Investor Relations.
Please go ahead.
Christy Masalem (Investor Relations)
Good morning and welcome to the third quarter 2026 earnings call for Adamas Trust. A press release and supplemental financial presentation with Adamas Trust’s third quarter 2026 results was released yesterday. Both the press release and supplemental financial presentation are available on the company’s website at www.adamasreet.com. Additionally, we are hosting a live webcast of today’s call, which you can access in the Events and Presentations section of the company’s website.
At this time, management would like me to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Adamas Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday’s press release and from time to time in the company’s filings with the Securities and Exchange Commission. Now at this time I would like to introduce Jason Serrano, Chief Executive Officer. Jason, please go ahead.
Jason Serrano (Chief Executive Officer)
Good morning. Thank you for joining our third quarter earnings call. Joining me today for comments is President Nick Ma and CFO Christineria. The third quarter, particularly September, was marked by a sharp increase in interest rate volatility and widening mortgage spreads, creating one of the most challenging environments for agency mortgages in years. I want to briefly discuss the factors driving this quarter’s market volatility, the actions we took, and why we believe Adamas is well positioned to capitalize on the opportunities this environment has created. Economic growth was strong in the quarter, with employment staying firm and significant AI infrastructure investment adding to demand.
Elevated energy prices from the prolonged Iran conflict pushed inflation data higher, quickly changing the expected path of monetary policy. In September the Fed raised the federal funds rate by 25 basis points, its first increase since 2023, and by quarter end markets were pricing several more hikes into 2027. Rates moved accordingly. The 10-year Treasury rose 82 basis points in the quarter, more than half of that in September alone, and ended at approximately 5.29%, the first time the 10-year closed above 5% since 2007.
Rate volatility rose sharply as well, with the MOVE Index ending the quarter at approximately 110, with commensurate widening of agency spreads. Against this backdrop and given how our portfolio was positioned, our adjusted book value ended at $8.88 per share in the third quarter, a decline of 19.6%. These are significant mark-to-market declines we witnessed in the quarter, albeit largely on an unrealized basis. Declines were primarily related to price reductions on our agency RMBS holdings. Despite a period of acute rate volatility, we did not liquidate any of these core assets. We preserved the potential for unrealized losses to be recaptured as the market normalizes.
Let me walk through our activities. We ended the third quarter positioned to earn attractive income. We adjusted as conditions changed and I want to highlight four main points. First, our liquidity got stronger while preserving our portfolio growth. We ended the quarter with $259 million of available cash, up 42% from the second quarter. Total excess liquidity capacity increased to $447 million. As it relates to financing, the agency repo market continues to function efficiently with strong counterparty engagement and multiple attractive financing options available to the company.
We own today the same high-quality, prepayment-protected collateral at lower prices across our agency RMBS holdings. Entering the fourth quarter with elevated liquidity, we are well positioned to recover book value and increase earnings. Second, we added new risk management positions to protect book value as volatility built. Through September, we established a strategic $2.9 billion short TBA position, primarily in coupons where we saw higher sensitivity to duration extension with incremental rate increases. We ended the quarter with company economic recourse leverage of 4.8 times and agency recourse leverage of 5.9 times, giving us room to add risk exposure with significant volatility.
Establishing TBA shorts was by design. As volatility intensified in the back half of September and through early October, with tail risk receding, we significantly reduced our TBA short position since quarter end, consistent with our intended approach to manage that exposure. Third, our EAD continued to cover our dividend. Earnings available for distribution was $0.30 per share, up 25% year over year and in line with our quarterly dividend, which increased 11% this quarter. This marks the seventh consecutive quarter in which EAD per share has equaled or exceeded our common dividend.
Fourth, the book value decline was a valuation event, not a result of distress in our credit book. Credit performance in our residential loan portfolio remains solid. In BPO Rental, our largest sector of credit exposure, 60+ day delinquencies declined 10 basis points to a low level of 1.4%. Throughout the year we have been focused on maintaining higher credit quality across our investments, including our origination channels. We have avoided niche and challenged sectors.
The positive performance is a direct result of this deliberate action. However, in the agency sector, as volatility increased in September, we saw a strong feedback loop forming where high rate volatility pushed spreads wider. Wider spreads reduced demand, and this reduced demand pushed spreads even wider. Through September we continued to add liquid TBA shorts with high average negative convexity risk profiles to protect value against future spread widening of agency bonds. By quarter end, the TBA short overlay totaled $2.9 billion.
The larger overlay was tactical for short-term protection as we looked for the market to normalize. Our commitment to the agency business and its earnings power is unchanged, as we see the underlying pools continue to generate attractive cash flows quarter over quarter. Thus, our goal was to restore our agency exposure by removing the TBA shorts on our balance sheet. As we saw the relationship between valuations, volatility, and prospective returns improve, early in October we closed out most of the TBA shorts.
We believe this is a disciplined and economically rational way to manage shareholder capital. The actions we took during and after the quarter have already started to see some retracement of third quarter book value decline so far in the fourth quarter. Company adjusted book value is up approximately 4% as of Monday 10/26, showing early indications of the portfolio’s ability to recapture the third quarter declines. As the markets normalize, we see the outlook for agency RMBS and our portfolio to be positive. September repricing has created one of the most attractive entry levels we have seen in recent quarters.
Most of the extension risk that drove our third quarter marks lower has already been reflected in current pricing, improving the stability of our agency cash flows. Also, higher-rate environments improve the technical picture of the agency bond somewhat. As an example, mortgage applications in October were down approximately 21% year to date through the third quarter according to the MBA, pointing to lower new issuance and a better supply-demand balance for agency securities.
Combined with today’s discounted valuations, we see real potential for spread stabilization. Turning to earnings, despite significant market volatility, EAD was $0.30 per share, consistent with the prior quarter and equal to our recently increased dividend. Importantly, agency adjusted net interest income grew to $39.3 million, up 7%. And single-family credit adjusted net interest income grew to $21.3 million, up 4% from the second quarter. The company’s strong EAD profile speaks to the strength of our earnings base.
That brings me to what I believe is an important development for Adamas. The repricing of mortgage assets has meaningfully improved our investment opportunity set. Our $1.20 per share annual dividend represents approximately 13.5% of our September 30th adjusted book value. We see compelling investments exceeding this level in our core strategies, with mid- to high-teens returns in the market today. This is without relying on aggressive leverage assumptions or rapid recovery in asset prices.
The pace at which they contribute to earnings and book value growth will depend on our capital allocation decisions and risk limits. But the improvement is significant, and the same volatility that pressured the value of the existing investments has raised the return available on our investment pipeline. We have deliberately maintained a liquid portfolio and substantial excess liquidity for several quarters, so Adamas has financial flexibility to take advantage of market dislocations like this to drive future earnings.
With that, I’ll turn the call over to Nick.
Nick Ma (President)
Thanks, Jason. The majority of the book value decline came from the agency portfolio and the positioning decisions we made there over several quarters. Ultimately, September’s price action was unfavorable to those positions with a severity that we did not anticipate. In July and August, we executed on our plan of growing recurring income through portfolio expansion. We invested almost $1.6 billion in the quarter, our most active acquisition quarter of the year. This was split between $1.2 billion in agencies and $395 million in single-family credit. The majority of the single-family credit purchases at $343 million was in BPL rental.
Our agency positioning heading into September rested on two intentional choices. The first was the coupon mix of our portfolio and the second was duration on coupon. Our spec pool portfolio had an average coupon of approximately 5.5%. The agency portfolio was primarily concentrated within the higher coupons of the stack where carry and net interest margin were attractive relative to the higher convexity risk. We also sought to mitigate this exposure through the prepayment protection embedded in our pools.
Second, on duration. The agency book, which represented 61% of the investment portfolio at the beginning of the third quarter, carried a duration gap of approximately 1.4 years. Midway through the third quarter, positioned to benefit from a decline in rates, September was a turning point in the market. We saw the convergence of three factors over a short period of time: a sharp move higher in rates, a surge in volatility, and spread widening. Over the quarter, agency current coupon spreads to Treasuries widened from 107 basis points to 120 to 125 basis points, nearly three-quarters of it in September.
September was the Bloomberg U.S. MBS Index’s worst month and worst quarter since September of 2022. The agency portfolio accounted for 78% of the decline in adjusted book value, nearly all of it mark to market. Drilling into the performance of our agency strategy long positions, we estimate that convexity was the largest contributor to the decline, accounting for 36%, followed by the duration gap at 32%, with the remainder attributable to spread and portfolio changes. Rising rates amplified the impact of negative convexity in our pools, while our interest rate hedges offset only part of the move. Our credit and macro hedges also provided less book value protection this quarter than before, when they helped offset first quarter volatility.
As we went through the quarter, we took two actions to limit the portfolio’s exposure to tail outcomes. The first was to reduce the agency duration gap, which was brought down to 0.3 years by quarter-end. The second was establishing a TBA short to address the risk of more drastic spread and convexity losses. We gradually put on the TBA short position in the quarter as we believed agency spreads still had room to widen while rates remained volatile.
The TBA shorts also helped reduce the duration gap and tempered the negative convexity in the portfolio. The position performed as intended, contributing a positive $0.29 per share to book value in the quarter. At quarter-end, the TBA short at $2.9 billion was sized at approximately 23% of our gross investment portfolio and 37% of our agency long portfolio, with an average coupon of 6.09%. It was meant to protect the book in the event of a further rate sell-off by concentrating exposure to the higher coupon agencies with greater convexity risk. The short position helped manage our exposure through the most severe phase of the market move, which allowed us to remain fully invested on the long side.
The TBA short was also structured to be a flexible and liquid risk management tool to allow us to adjust our position quickly as market risks evolved. It is important to highlight again that we did not sell any cash bonds, which kept the book value decline predominantly as unrealized. In fact, our spec pool balance grew from $6.4 billion to $6.9 billion since quarter-end. We have been equally deliberate with the TBA short position, being reduced almost 76% to $680 million as of October 26th. We have also widened the duration gap of the agency portfolio to around 0.6 years since quarter-end. As rate volatility eased and the 10-year started retracing from its highs, we covered the majority of the TBA short, increasing the risk exposure in the pools that we own. The portfolio we own today is the one that we want to own for a recovery, now carried at more attractive prices.
In residential credit, pricing reflected higher rates while credit fundamentals remained stable. Non-QM AAA spreads widened from 130 to 150 basis points. We see a benign housing market with low transaction volumes, with virtually all outstanding borrowers being out of the money to refinance and at mortgage rates above 7%. Securitization markets stayed open through the bond sell-off, with year-to-date non-agency issuance reaching approximately $203 billion by the end of September and over $210 billion by late October, albeit at wider spreads and with structures shifting in investors’ favor.
In this market, we remain highly confident in our credit strategy, which continues to emphasize high-quality borrowers and collateral. This is supported by the strong performance we see across our assets. In BPL Bridge, we continue to manage the orderly runoff of the portfolio, which has declined 46% year-to-date, while delinquent loan balances have remained roughly unchanged. Our multifamily mezzanine portfolio performance has been stable while payoffs continue to occur at an annualized rate of 55% in the quarter. Capital released through the runoff of these non-core strategies will be redeployed into what we see as an even more attractive risk-adjusted return in the current market environment.
Also, the investor demand for our securitization program of BPL rental is clear evidence that our focus on high-quality credit and prepayment protection is attractive to institutional investors. Constructive demonstrated the strength of its origination model in a challenging quarter. It originated $406 million of loans, with 84% of those originations in BPL rental. Adamas Trust has purchased 57% of Constructive’s production in the quarter, giving us a proprietary source of assets. Importantly, though, all of Constructive’s third quarter originations were subject to investor purchase arrangements within only a few days of the borrower rate lock, a loan sales strategy designed to help limit interest rate and pricing risk.
When rates rose sharply in September, Constructive continued to distribute its production efficiently. Because Constructive has continued to lend at competitive pricing while still steadily moving up its coupons alongside prevailing mortgage rates, we believe Constructive is well positioned to capture additional market share in BPL rental. I will now pass it over to Christine to discuss our financials.
OPERATOR
Thank you. As mentioned, we’ll now conduct a question-and-answer session. As a reminder, to ask a question you’ll need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile our Q&A roster. Your first question comes from the line of George Bose with KBW. Your line is now open.
Frankie Libetti (Analyst at KBW)
Hey, good morning, guys. This is Frankie Libetti on for Bose. Helpful color on the book value decline in the prepared remarks, but I want to touch on maybe the timing on the decline, and can you quantify any decline that happened before the TBA shorts were added? And then, given that most of the shorts are now removed, how are you positioning the hedge book going forward to manage current rate and spread volatility?
Nick Ma (President)
Sure. This is Nick. So, third quarter was a volatile quarter. If you remember, there were periods of time in August—so July there was somewhat of a sell-off, August there was a little bit of reprieve—and then September was when a lot of things started moving. In terms of the timing of the TBA shorts, the majority of the TBA shorts were put on in the September timeframe; however, through the third quarter there was obviously re-hedging of duration throughout that period of time.
But we still, as I mentioned earlier, maintained somewhat more of a duration gap going into September because we thought that a lot of the rate moves were going to be short-lived, and surprisingly a lot of technical forces also created what happened in September. Relating to the second part of your question, one of the reasons why we took off the TBA shorts is because we believe that the tail risk of outcomes in spread and convexity have significantly declined. We have seen the 10-year Treasuries moderate into this new trading range from the highs of 5.35%. Now we’re trading around 5%. The MOVE index showing volatility has also come down since quarter-end. Forced selling by leveraged players in agency MBS—which, anecdotally, has been more from the hedge fund community than REITs—has also dissipated since Q3.
The duration extensions are mostly behind us at this point, which should dampen pressure to sell or re-hedge. And on the supply side, we’re also entering into a new phase of higher mortgage rates, which may keep originations low for the rest of the year. So several reasons why we took that off. However, we are still running a tighter duration gap than we were in the middle of Q3 for several reasons. There’s been no real resolution to the Iran conflict. Oil is meaningfully higher today than it was at the end of Q3. A lot of the factors that started the initial rate sell-off are still in play or unresolved at this point in time. And also we have midterms on the horizon, which may introduce possible volatility. So we are still managing a lot of the risks using a combination of Treasury futures as well as some of our macro and credit hedges.
TBA shorts are still part of the portfolio today. They may increase or decrease depending on what the market gives us, but we intend to be dynamic in that respect.
Frankie Libetti (Analyst at KBW)
That’s very helpful. And then just on capital deployment, given where spreads are today, where are you looking to deploy capital today and how do you think about total leverage on the portfolio? Thank you.
Nick Ma (President)
Sure. As Jason mentioned, we see returns across our core strategies, whether it’s in resi credit or in agencies, in the mid to high teens. So very attractive return profile overall. I think in terms of guidance in terms of allocation, I think one of the fastest ways the portfolio will grow initially will be through the agency channel. We have TBA shorts on; as we take them off, as we have been, the capital allocation to agencies will increase back to more normal levels.
After that point, we see it roughly balanced through time. Obviously, some things that I’ve mentioned earlier—where mortgage volumes may be challenged—we’re seeing that potentially in the broader BPL rental space happening in Q4. So it will take more time to deploy into BPL rental, even though we do see more attractive returns. So agencies is usually the first lever that we can pull in terms of allocation. But we do expect that to become more roughly balanced as we get into Q4.
Frankie Libetti (Analyst at KBW)
Thank you.
OPERATOR
Thank you. Your next question comes from the line of Timothy D’Agostino with B. Riley Securities. Your line is now open.
Jack Biggs (Analyst at B. Riley Securities)
Hi, this is Jack Biggs filling in for Tim. The October BPL rental securitization was priced 67 bps wider than Q3. Was that primarily due to spread widening, or did deal mix play any part in that widening? Thank you.
Nick Ma (President)
Yeah, the super majority of the differential is really with baseline rates. If you look at the average execution of that deal on a net financing spread perspective, it was 159 basis points, which is wider, but the bigger differential is really on the rate side. And the one thing I will say is that the securitization markets continue to be well functioning. The Adamas shelf and issuance continues to execute more efficiently than the average deal, and we still get some benefit in terms of spread because of investor recognition of our program, our historical performance, and prepayment protection that our loans offer.
Jack Biggs (Analyst at B. Riley Securities)
That’s helpful. Thank you for taking my question.
OPERATOR
Thank you. Your next question comes from the line of Doug Harter with BTIG. Your line is now open.
Doug Harter (Analyst at BTIG)
Thanks. If you could just help us think through leverage and capacity. On leverage, clearly 3Q and partial 4Q recovery, book value is down. Just how should we think about the capacity to maintain this size investment portfolio given that decline in book value?
Jason Serrano (Chief Executive Officer)
Hi, this is Jason Serrano. We purposely took down our economic leverage in the quarter. As you see on the agency side, we left the quarter, second quarter at 8.3 times. We ended the third quarter at 5.9 times. And that was a purposeful reduction of risk that we saw going into that last week in September with where that feedback loop I described on my prepared remarks was intensifying with the, as Nick mentioned, with the paring off of our TBA shorts, we do expect to take leverage back to levels we’ve been running for the last few quarters.
And with that normalizing our total size of our agency assets as well, we have flexibility in our available cash, as I mentioned earlier as well. With the total cash balances increasing and total excess liquidity increasing in the quarter, we can continue in our path of allocating appropriately between the two asset classes. Nick mentioned looking at credit with high rates, we think our originator will pick up market share through some of the financial conditions that we’re seeing with potentially other originators in the market. So while the market shrinks slightly with higher rates, we think we can pick up a larger share of that over time, which is where we’ll be focused on dedicating our capital on the credit side of this perspective.
So overall, the reduction of book value was an unrealized event for the company. Didn’t affect any financial covenants or any cash balances that we have on our balance sheet that we can use to go forward and invest as we sought through our plan in the third quarter.
Christine (Chief Financial Officer)
Yeah, it’s Christine. The increase in that repurchase reserve was really tied to a specific borrower relationship, a legacy relationship. And these are loans originated before we acquired Constructive. And we really view this as an isolated legacy issue and not something that reflects, you know, the performance of Constructive’s current production. And as part of that acquisition, we had established about a 2.5 million of indemnification holdback to cover these type of exposures.
And so we applied approximately, I guess, 1.5 million against that holdback during the quarter, leaving about a million remaining. So while repurchase obligations are a normal part of the origination business, we believe we’ve appropriately reserved for this particular exposure. Based on what we know today and what we’re seeing. We’re not seeing anything that suggests there’s a broader issue with the business.
OPERATOR
Thank you. I’m showing no further questions at this time and would now like to turn it back to Jason Serrano for closing remarks.
Jason Serrano (Chief Executive Officer)
Yes, thank you for joining the call today. We look forward to sharing our Q4 results in the new year. Have a great day.
OPERATOR
Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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