Adamas Trust, Inc. Common Stock 2026 Q3 Earnings Call

Please go ahead. Good morning, and welcome to the third quarter 2026 earnings call for Adamas Trust.

A press release and supplemental financial presentation with Adamas Trust third quarter 2026 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.adamasreit.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. Good morning.

Thank you for joining our third quarter earnings call. Joining me today for comments is President Nick Mah and CFO Kristine Nario. 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 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.

The 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 BPL Rental, our largest sector of credit exposure, 60+ 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 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 improved. As such, early in October, we closed out of 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 at all volatility that pressured the value of 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.