Earnings Call Transcript - ADAM Q4 2025

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Adamas Trust Fourth Quarter 2025 Results Conference Call. This conference is being recorded on Thursday, February 19, 2026. I would now like to turn the conference over to Kristi Mussallem, Investor Relations. Ma'am, please go ahead.

Kristi Mussallem, Investor Relations

Good morning, and welcome to the Fourth Quarter 2025 Earnings Call for Adamas Trust. A press release and supplemental financial presentation with Adamas Trust's fourth quarter 2025 results were 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 the 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, CEO

Hello. Thank you for joining us today to discuss our 2025 fourth quarter results. With me this morning is Nick Mah, President; and Kristine Nario, our CFO. We are excited about entering a new year as 2025 represented a strategic inflection point for the company, characterized by significant balance sheet growth, accelerating profitability and a strategic expansion into Constructive, a leading business purpose loan originator. We exited 2025 stronger and larger than at any point in our history. The transformation of Adamas over the past year has been deliberate and decisive. We expanded scale, materially enhanced recurring earnings power, strengthened the balance sheet and positioned the company for durable long-term growth. Our Q4 results are another validation of our strategy, which reinforces our confidence in the trajectory ahead. Salient 2025 company performance highlights include: $3.1 billion investment portfolio expansion, a 44% increase to earnings available for distribution year-over-year, where we generated over $100 million of net income, leading to a 15% increase to our common dividend. All these factors contributed to generating a 36% cumulative total stockholder return, a transformational year where we also grew company book value. We stay firm with the disciplined capital allocation, active portfolio management and a clear strategic vision by meaningfully increasing our allocation to Agency RMBS. We improved liquidity, reduced credit volatility, enhanced financing flexibility and strengthened the trajectory of earnings. The balance sheet today is materially more resilient than it was a year ago and positioned well for 2026. The addition of a powerful new earnings engine in the full acquisition of Constructive strategically positioned Adamas to benefit from both stable spread income and scalable origination economics, a combination that we believe differentiates our platform. As an update to fourth quarter, GAAP book value and adjusted book value increased by 4.3% and 2.4%, respectively, continuing the positive momentum we generated throughout the year. Quarterly EAD of $0.23 per share fully covered our dividend but declined by $0.01 sequentially. This slight reduction from last quarter was anticipated and directly tied to the J-curve effect discussed in our third quarter communication related to the integration of Constructive. Importantly, this temporary negative impact reflects upfront integration and scaling costs, not structural earnings pressure. As we transition from integration to production, we expect Constructive to be a positive contributor to EAD in the first quarter. Throughout 2025, we found scaling Agency RMBS to be both an attractive investment on an absolute and relative basis, providing mid- to high-teens equity returns. We increased the company's Agency RMBS portfolio by $3.4 billion or 56% of company capital from 23% a year earlier at an attractive average spread to treasury interpolated between 5- to 10-year maturities of 139 basis points. The strategic reallocation of capital throughout the year enhanced liquidity and balance sheet flexibility, also lowered our credit exposure and tail risk as well as increased visibility into book value performance. Now against that base, Constructive's DSCR origination platform introduces significant upside potential. As volume scales and efficiencies are realized, we believe the earnings contribution from the DSCR production from both a gain on sale as well as interest income from loans held can expand materially. We are excited to demonstrate the operating leverage embedded within our business model in the new year. Despite the transformation of the company, Adamas shares continue to trade at a substantial discount to intrinsic value. At year-end, the shares traded at a 31% discount to book value. Even more compelling, the market capitalization represents approximately a 14% discount to just the Agency capital held on our balance sheet alone. In practical terms, the market in 2025 and continuing in early 2026 is assigning limited to no value to our non-Agency and multifamily holdings, our scaled origination platform with an exciting embedded earnings growth track and our ability to grow book value. We believe the discount creates compelling upside potential as we continue to execute and expand earnings and demonstrate sustained book value accretion. We have entered 2026 with strong momentum. In the first quarter, we are off to an exceptional start as adjusted book value is up between 3% to 4%. At the same time, Constructive DSCR originations are beginning to contribute to earnings as expected. As acquisition efficiencies are realized, we see a clear path to expanding EAD in 2026. We are highly encouraged by the early results and increasingly confident in the earnings power of the platform. We approach 2026 with conviction and optimism in the macro backdrop. The progression of the Fed easing cycle, coupled with declining volatility has created a favorable environment of lower rates and tighter spreads. The current administration's policy focus of improving housing affordability and reducing mortgage rates further reinforces our positive outlook on the residential assets. Our goal is to maintain flexibility to capitalize on emerging opportunities and to direct capital to the most attractive risk-adjusted returns in the residential mortgage market. Dividend sustainability remains a core priority. In the year, we are focused on balancing competitive yields to expand reoccurring earnings with robust coverage and long-term capital preservation. We are energized by the opportunity in front of us and confident in our ability to deliver long-term value for our stockholders. At this time, I'll pass the call over to Nick for a market and strategy update.

Nicholas Mah, President

Thank you, Jason. As we close out 2025, we are excited to have delivered significant EAD expansion alongside book value growth. Looking forward, we are confident that our two-pronged approach of investing in Agency RMBS and high-quality residential credit remains the optimal strategy for the current market environment. In the quarter, we deployed $810 million into residential assets, reflecting another period of solid investment activity. Agency RMBS purchases totaled $347 million in the fourth quarter as tightening spreads moderated the pace of acquisitions. In residential credit, we invested in $276 million of BPL-Rental loans and $181 million of BPL-Bridge loans. This marks the first quarter where rental loan purchases exceeded bridge loan purchases, reflecting our deeper utilization of Constructive's origination capabilities in rental loans. We anticipate that this trend will continue. Our Agency portfolio ended the year at $6.6 billion, doubling in size over the course of 2025, constituting 63% of our investment portfolio and 56% of our equity capital. Agency RMBS now represents our single largest asset exposure. In the fourth quarter, our Agency purchases were concentrated entirely in 5% coupon spec pools. We have continued to target low pay-up spec pools at or slightly under the current coupon, where we see the best balance of positive net interest margin duration upside and a more favorable convexity profile. Agency leverage also declined slightly in the quarter, falling to 7.7x from 7.8x. The pace of Agency acquisitions was tempered by meaningful spread compression during the period. Current coupon agency spreads tightened by 16 basis points, narrowing from 126 basis points to 110 basis points. Interest rate volatility fell meaningfully in the fourth quarter and has steadily declined since the tariff announcement in April, providing the impetus for tightening spreads in agencies. Despite spreads normalizing toward longer-term averages, we continue to see value in Agency RMBS. Our capital allocation to Agency is expected to grow through 2026 to between 60% and 70% of equity capital. We will adjust the pace and magnitude of future acquisitions opportunistically in response to spread movements and broader market conditions over the course of the year. Our BPL-Rental portfolio has almost doubled over the course of 2025, growing from $770 million to $1.4 billion. This core strategy has benefited from the integration of Constructive's origination platform alongside our disciplined underwriting standards. Borrower metrics remain strong across the BPL-Rental portfolio with a 748 average FICO, 71% average LTV and 1.36x DSCR. Credit performance has been robust with delinquencies remaining low at 1.4%, a direct result of our focus on credit quality. In 2025, we completed 4 securitizations across our home loan portfolio. We continue to aggregate loans to execute securitizations, and we are on pace for executing one BPL-Rental deal a quarter, targeting a mid- to high teens levered return. In the fourth quarter, non-QM AAA spreads remain range bound at around 130 basis points. Into the new year, however, we have seen meaningful spread compression as non-Agency AAA spreads have converged towards Agency levels, creating a favorable environment for us to grow our BPL-Rental loan securitization program. We continue to take a selective approach in BPL-Bridge, where the portfolio stands at $820 million of UPB, a decline from $1.2 billion at the beginning of the year. The proliferation of revolving securitizations across a myriad of issuers has intensified buyer competition, driving yields tighter. At this juncture, we see more compelling opportunities in agencies and BPL-Rental, and we expect the size of the BPL-Bridge portfolio to decline throughout 2026. Constructive continues to scale successfully, delivering its highest volume quarter of the year in Q4 with $474 million of originations. Constructive originated $1.8 billion worth of loans in 2025, with 93% of those originations in BPL-Rental, reflecting a strong alignment with our core credit strategy. Origination quality remains robust with a weighted average FICO of 751 and an average LTV of 74%. After our full acquisition of the platform, Constructive's loan production now matches closely with Adamas' investment criteria. We target strong borrower profiles in the stable segments of the credit spectrum. Beyond disciplined credit underwriting, we have deliberately minimized originations at the margins of securitization eligibility and shifting institutional buyer mandates, concentrating production where institutional sponsorship and secondary market liquidity are the strongest. Over the past 12 months, new construction loans have represented less than 2% and multifamily loans have represented less than 5% of Constructive's total origination. We expect Constructive to become a strategic earnings driver and sourcing engine for the firm. In the quarter, Adamas purchased 44% of Constructive's originations, deliberately striking a balance of investment portfolio growth and the cultivation of Constructive's third-party distribution network. Through Constructive, we benefit from a capital-light model that produces both gain on sale revenue and a proprietary investment pipeline. We have the flexibility to direct BPL-Rental originations to our portfolio or to the secondary markets as conditions warrant, and we expect a broadly balanced allocation between the two in 2026. In multifamily, we had another positive quarter of resolutions at an accelerated 39% annualized payoff rate. Performance has been strong throughout 2025 with only one delinquent and one restructured asset, both unchanged over the course of the year. As the portfolio seasons, we anticipate that the pace of payoffs will be higher than the historical average of 26%, and we will continue to redeploy the proceeds into our higher-yielding core strategies. Our diversified agency and credit portfolio paired with constructive origination capabilities provide us multiple avenues to grow earnings in this market environment. We are well positioned to extend this momentum in portfolio growth and earnings through 2026.

Kristine Nario, CFO

Thank you, Nick, and good morning, everyone. For the fourth quarter, we reported GAAP net income attributable to common stockholders of $41.6 million or $0.46 per share and earnings available for distribution of $0.23 per share, which fully covered our quarterly dividend. After accounting for a $0.23 dividend, we generated a 6.85% economic return on GAAP book value and a 4.62% economic return on adjusted book value. For full year 2025, economic return on GAAP and adjusted book value was 12.72% and 11.01%, respectively. Our quarterly performance benefited from strong investment mark-to-market gains. We saw spread tightening across Agency RMBS and certain portions of our residential loan portfolio, which increased asset valuations and contributed meaningfully to earnings. In addition, gains on our interest rate swaps contributed to our results as swap spreads widened during the quarter. Adjusted net interest income increased to $46.3 million in the fourth quarter from $42.8 million in the third quarter, and net interest spread remained stable at 152 basis points. These results reflect our continued portfolio repositioning toward Agency RMBS and BPL-Rental loans while also benefiting from improved financing costs. Partially offsetting the positive valuation impact that I mentioned earlier, we recorded $14.9 million of realized losses, primarily related to discounted payoffs and resolution activity on certain nonperforming residential loans and valuation adjustments on foreclosed properties primarily related to our BPL-Bridge portfolio. These actions reflect ongoing active portfolio management and credit resolution efforts. And in most cases, the realized losses have been substantially reflected in prior period marks. Turning to Constructive. The platform continued to demonstrate solid origination momentum during the quarter. Constructive generated $12.5 million in mortgage banking income, driven by higher origination volumes and related origination fees, partially offset by lower valuation on interest rate lock commitments and the prudent increase in loan repurchase reserves. Constructive incurred $4.3 million in direct loan origination costs and $10.2 million in direct G&A expenses, resulting in a $2 million loss for the quarter on a stand-alone basis. Direct G&A for Constructive increased in line with higher production volumes, the full quarter impact of consolidation and also continues to include expenses associated with integration. We view these items as part of the normal progression of integrating and scaling the platform. Origination activity and pipeline trends remain healthy and as integration efforts moderate and production continue to grow, we expect a more consistent earnings contribution from Constructive. At acquisition, we estimated Constructive to generate approximately a 15% annual equity return, and our current expectations remain aligned with that target. Total consolidated Adamas G&A expenses were $25.1 million for the quarter, up from $23.3 million last quarter, reflecting the full quarter consolidation of Constructive. From a capital markets perspective, we continue to strengthen our balance sheet. During the year, we issued $198 million in senior unsecured notes to extend and diversify our funding profile. Subsequent to quarter-end, we issued $90 million of 9.25% senior unsecured notes due 2031 and redeemed our $100 million 5.75% senior unsecured notes due 2026 at par, retiring that obligation ahead of its April maturity. As a result, we now have no corporate debt maturities for the next 3 years. This provides meaningful flexibility and positions us to focus our capital on growing the investment portfolio rather than addressing near-term refinancing needs. At year-end, we maintained $206 million of available cash and approximately $420 million of total liquidity capacity, including financing available on unencumbered and underlevered assets. Our company recourse leverage ratio was 5x and portfolio recourse leverage ratio was 4.7x, with leverage primarily concentrated in Agency financing. Overall, our strategic repositioning has strengthened the durability of our earnings profile and positioned the company for continued growth in recurring income. We remain focused on disciplined execution and delivering sustainable returns for our stockholders. That concludes our prepared remarks. Operator, please open it up for questions.

Operator, Operator

Our first question will come from Doug Harter with UBS.

Marissa Lobo, Analyst

It's Marissa Lobo on for Doug today. On the pace of deployment between Agency MBS and residential loans in 2026, how are you viewing the relative attractiveness of Agency MBS given the significant spread tightening year-to-date?

Nicholas Mah, President

Yes. From a levered return perspective, we observe higher returns on the non-Agency credit investments, particularly BPL-Rental. For this asset class, we see levered returns in the mid to high teens compared to the mid-teens return from agencies on a levered hedge basis. We maintain a positive outlook on both asset classes as they provide balance and diversity to our portfolio. As previously mentioned, we anticipate growth in the Agency portfolio, which currently represents 56% of our equity capital, and expect it to rise into the 60s if market conditions remain favorable. We believe the non-Agency portion will stay relatively constant; this is not due to a lack of interest in increasing our BPL-Rental exposure—rather, it's because BPL-Bridge pays down quickly and presents fewer opportunities. Consequently, the mix within non-agencies will evolve, but the overall percentages in the non-Agency side should remain stable. The additional equity capital will arise from ongoing resolutions in the multifamily portfolio and other noncore strategies.

Marissa Lobo, Analyst

That's very helpful. And looking at the expenses related to the Constructive acquisition, how should we think about the remaining integration costs and the 2026 run rate for operating expenses related to Constructive?

Kristine Nario, CFO

We are still experiencing some integration costs from the Constructive acquisition in the first quarter, as we've only been involved for about six months. Regarding the G&A ratio, it's estimated to be around 77.5% of stockholders' equity, with approximately 44% of that attributed to Constructive and the remainder to Adamas. For Constructive, about 40% of their G&A is variable and directly linked to origination activities, which gives us significant expense flexibility as volumes change. Thus, we're looking at a run rate of approximately 7% to 7.5% of stockholders' equity.

Marissa Lobo, Analyst

Could you elaborate on the recent change in the gain on sale, which is attributed to lower commitment valuations and an increase in loan repurchase reserves? What are the implications for the valuation of loans on the balance sheet?

Kristine Nario, CFO

We think the current situation is transitional. Regarding the interest rate lock valuation, it was mainly affected by a smaller pipeline compared to last quarter and slightly lower pull-through rates, which reflect the pricing conditions during this period. These changes align with typical market fluctuations from quarter to quarter, and we are actively monitoring and managing the pipeline to ensure it aligns with current market conditions. When it comes to purchase reserves, we decided it was wise to increase the repurchase reserves, which is closely related to our acquisition of a 50% interest in Constructive. Nick can provide more details on this.

Nicholas Mah, President

We efficiently coordinated the timing and scale of some repurchases and the related reserves in collaboration with our former equity partner in the Constructive business. Most of these actions took place in the fourth quarter to take advantage of provisions and indemnities that were part of the Constructive purchase transaction. We do not view the repurchase loan loss reserves as an indication of increasing loss trends or credit concerns for 2026. We are very confident in the current credit underwriting we have in Constructive.

Operator, Operator

Our next question will come from Bose George with KBW.

Francesco Labetti, Analyst

This is actually Frank Labetti on for Bose. I want to start with discussing balancing between capital deployment between scaling Constructive originations versus increasing Agency deployment or share repurchases? And then is there like a preferred return threshold guiding that allocation going forward?

Jason Serrano, CEO

Thanks for the question. We're aiming for mid- to high teens returns on a risk-adjusted basis through the various avenues where we invest our capital. This can vary each quarter based on market conditions and underwriting trends. Regarding Constructive, we see it as a capital-light model thanks to their wholesale origination business. We're focusing on generating gains from selling to third parties as well as retaining some on our balance sheet for origination and securitization activities, with the expectation of one securitization per month. However, we do not plan to significantly increase capital allocation for that strategy, even if we wish to grow origination volumes. This was a key reason we were interested in Constructive's business model years ago; it offers flexibility on costs, keeping them stable regardless of origination trends. Therefore, we anticipate consistent capital allocation there. As for asset classes, Nick mentioned a target of 60% in agencies, which reflects where we currently see value in the market. We're observing an interchange between BPL-Bridge and rental, with BPL-Bridge expected to decrease on our balance sheet due to payoffs and limited opportunities. We continue to support efforts in the rental space for Constructive and see value there. Ultimately, our allocations will depend on market conditions, and we'll make prudent capital decisions accordingly.

Nicholas Mah, President

One follow-on comment on Constructive. So we're still in the process of transition, and there are still things that we can do to increase volume and increase efficiencies and reduce cost that does not require capital, like, for example, getting them better financing lines with better terms, whether it's providing our captive capital to reduce the time, the warehouse time that they have their loans under. So there's things that we can do that doesn't necessarily require additional capital, and we're actually focused on those things first before planning to put additional capital in.

Francesco Labetti, Analyst

Great. That's very helpful. And then sticking on Constructive, can you just talk about the competition in the business purpose lending channel? Demand for the product is clearly very strong. Are you seeing any new entrants in the space and any pressure on margins there?

Nicholas Mah, President

Yes, in the competition for DSCR loans, we have been active in this area for some time and have observed the fluctuations in competition. Currently, it is quite competitive. There is strong demand for loans from institutional buyers in both non-QM and BPL-Rental/DSCR, which has prompted originators to expand in this sector. From our viewpoint, Constructive remains a leading player with long-term relationships, effectively managing the competitive landscape. We’ve noticed that some larger non-QM originators are increasingly channeling a greater share of their originations into BPL-Rental, a trend we anticipate will persist. Additionally, Constructive has formed partnerships with these larger entities to increase volume. The market is continuously evolving, and while demand remains robust, we are aware of the competition and are handling it effectively.

Francesco Labetti, Analyst

Great. And just one more question, if I may. Did you provide an update on book value for the quarter to date?

Nicholas Mah, President

Yes. In Jason's remarks, he mentioned that adjusted book value is up between 3% and 4% so far this quarter.

Operator, Operator

Our next question comes from the line of Matthew Erdner with JonesTrading.

Matthew Erdner, Analyst

There's been a lot of talk about institutionals or I guess, institutions being banned kind of from that rental space. Could you talk about just the profile of borrower that you guys have? And if that were to occur, what impact it would have?

Nicholas Mah, President

Sure. We believe that if this policy is implemented, it will benefit Constructive's business. Constructive primarily provides loans to individual investors rather than institutional investors. Each borrower who received loans from Constructive in 2025 owns fewer than 80 single-family properties, and the average number is much lower. In contrast, institutional investors own thousands of single-family rental properties. We currently lack detailed information, but the White House executive order is aimed at limiting purchases from what they refer to as Wall Street investors and large institutional investors. The specific definitions are still to be determined, but these terms do not typically describe Constructive's client base. Overall, I believe that if there is a prohibition on institutions owning single-family rentals, it would be advantageous for Constructive, as it would likely increase the availability of homes and transactions while decreasing the competition for homes targeted by our borrowers.

Matthew Erdner, Analyst

Got it. Got it. That's helpful. And then apologies if I missed this on the last question, but could you kind of talk about share repurchases? If you did any during the quarter, I don't think you did and how you're viewing that going forward?

Jason Serrano, CEO

We view share repurchases as a different way to allocate capital compared to the opportunities in the market. In the fourth quarter, we did not repurchase any shares. We consider our price to book and the value gained from utilizing capital for that purpose. Share repurchases lead to a permanent reduction in capital since those shares are retired, meaning we can't hold them in treasury for later issuance. Therefore, we focus on evaluating whether the capital allocated to our investment programs provides more value than the permanent dilution associated with share repurchases. This is something we consistently assess and include in our core capital allocation models. In prior quarters, we have repurchased shares when market conditions were favorable, and we will keep evaluating that option moving forward.

Matthew Erdner, Analyst

Got it. That's helpful. And then last one for me. How are you guys looking at Agency leverage given that we've kind of moved into a tighter spread range? Obviously, there's the GSE backstop, I guess, with their loan purchases. Just how are you guys thinking about leverage?

Nicholas Mah, President

Yes. So in the quarter, leverage declined slightly. Right now, it's about 7.7x. Historically, we have run leverage up into 8, 8.5x leverage. For now, we are probably going to be trending on the lower end, so closer to the 7.7x. But depending on how market conditions, we could go higher.

Operator, Operator

Our next question will be from the line of Timothy D'Agostino with Equity Research.

Timothy D'Agostino, Analyst

With the comments on 60% to 70% of equity capital being Agency and potentially seeing a decline in BPL-Bridge in 2026. I was just wondering, the total investment portfolio size currently is at $1.5 billion. Do you have like a target size you or goal you're trying to reach? Or do you have any near-term like percentage increases? Just thinking about what you're striving for in terms of the total portfolio size maybe at the end of '26 or at the end of 2027.

Jason Serrano, CEO

Yes. So the goal is to maximize our total return within our portfolio. And that's where we start with looking at capital allocation. So in doing so, when the market has different moves and whether it's on credit or any Agency, we will look to change our capital allocation relative to those 2 different asset classes. So there is not a target that we are focused on reaching as a sense of just reaching the target versus maximizing our recurring earnings that we have in our portfolio. The comments that Nick made earlier on the targets around 60% is based on what we see the market giving us today and the different roll-offs of noncore strategies we have in our balance sheet. So yes, we don't have a capital allocation model that focuses on either investment portfolio size or a certain percent that we need to be in either strategy. It's really where we see the best risk-adjusted returns in the market and how do we maximize our earnings potential.

Timothy D'Agostino, Analyst

Okay, great. For my second question, regarding available cash, it seems you averaged about $170 million over the past five quarters, and at year-end, you reported $206 million in available cash. Could you provide an overview of how you plan to allocate that cash? Are you looking to continue stockpiling, or are you seeing a rotation of capital? Any insights on the available cash at year-end and your intended use of it would be appreciated.

Jason Serrano, CEO

Yes. As the strategy and spreads within the Agency tighten towards year-end, it did impact our initial expectations for portfolio growth at the start of that quarter. Consequently, we concluded the quarter with more cash than anticipated, which was partly the reason for maturing our 5.75% notes due April 2026. We identified an opportunity based on our cash allocation and the imminent maturity. Overall, our focus remains on continued deployment in two areas: a capital-light approach on the Constructive side and seeking opportunities within the Agency sector. If the market slows down on the Agency side, we anticipate further deployments and are looking for more opportunistic trades in the broader market instead of a fixed deployment schedule.

Operator, Operator

I am showing no further questions at this time. And I would now like to hand the conference back over to Jason Serrano for closing remarks.

Jason Serrano, CEO

Yes. We appreciate your continued support and look forward to discussing our first quarter results in April. Have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.