Atrium Mortgage Investment Q3 2023 Earnings Call Transcript

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November 15, 2023

There are 3 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Atrium Mortgage Investment Corporation Third Quarter Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on November 15th 2023. I would now like to turn the conference over to Mr.

Operator

Robert Cudall. Thank you. Please go ahead.

Speaker 1

Thank you, and thanks for calling in today. Our CFO, John Ahmad, will start by talking about our financial results, And then I'll speak about our performance from an operational and portfolio perspective. John? Thank you, Rob. Intrium posted an earnings per share of $0.25 in Q3, which is down slightly from the prior year quarter of $0.27 This represents a solid performance outcome given the current market conditions facing our industry.

Speaker 1

The Q3 earnings exceeded the dividends declared for the quarter $0.225 And more importantly, our year to date EPS of $0.91 is on a record pace and well ahead of the $0.77 posted last year at this Our earnings for the quarter were driven by a record time mortgage portfolio balance of $876,000,000 which is up $51,000,000 over the quarter and a record level of revenues driven by a high portfolio rate of 11.49% at quarter end. Offsetting a portion of the strong operating margin generated by our portfolio was a provision for mortgage losses to recognize increased credit risk in our portfolio, and we'll touch on that in more detail shortly. Despite slower real estate market conditions, The business managed to originate $115,000,000 of mortgage principal, which was almost double from last quarter. This was offset by $64,000,000 of repayments, which had slowed down from an average of around $87,000,000 experienced in the 1st 2 quarters of the year. The portfolio rate of 11.49% at Quarter end is a record for the company and is up from 11.27 percent over Q2 due to a 25 bps rate increase by the Bank of Canada on July 12, 2023.

Speaker 1

89.3 percent of our portfolio is priced off of floating rates, and this percentage has increased steadily from 75.4 The balance of our portfolio that is not loading is mainly comprised of single family mortgages with terms of 12 months. So they too reprice quickly and helped drive our portfolio rate higher over the quarters. Assuming no rate changes from the Bank of Canada, We could expect our portfolio rate to come down slightly as we continue to focus on sourcing high quality, lower risk mortgages at this time. Our funding profile continues to remain strong at quarter end. Borrowings under the credit facility were $208,000,000 at quarter end We benefited from a pay down of $13,000,000 due to the sale of our investment properties in Regina, Saskatchewan with a small gain over book value.

Speaker 1

This helps to create more funding capacity and acquire more accretive assets. In addition, on August 28, we successfully extended our credit facility We improved our leverage ratios and yet no change in pricing. At quarter end, our floating rate credit facility represented just 24% of our funding stack and our convertible debentures of $157,000,000 continue to be lofting at favorable rates maturities staggering over the next several years. Overall, this continues to be a very low leverage business as total debt And the slowing economic growth profile has had a significant impact on all on real estate markets and for all market participants. We've seen some of that risk manifest in our portfolio, which we watch very closely on a loan by loan basis.

Speaker 1

During the quarter, the provision was taken mainly against Stage 2 loans, which are loans that exhibit higher credit risk than normal, have increased from $77,000,000 to $109,000,000 at quarter end. This was due to an increase in defaults, but also include loans where there is no default In terms of Stage 3 or impaired loans, we have now classified $23,000,000 loans into the Stage 3 category for the first time this year due to the outcome of our assessment of specific borrower default situations. We assessed each loan in Stage 2 and Stage Our Stage 1 results on performing loans remain elevated at 1.48% as well given weak forward looking macroeconomic indicators. Despite challenging market conditions, we believe our business can continue to deliver solid results for shareholders and Q3 is no exception. We are on a record pace earnings wise on a year to date basis despite headwinds in the real estate markets.

Speaker 1

Our balance sheet remains strong with plenty of capacity for growth And liquidity should the need arise. And we continue to operate a low leverage and lean business model in terms of operating expenses. Our focus is always to emphasize risk management before growth, but our business also remains agile with respect to market opportunities should they arise. Rob, I'll pass it over to you for portfolio and general business updates. Thank you.

Speaker 1

As John said, we had another very profitable quarter. Atrium's Basic earnings of $0.25 a share were only slightly below last year's 3rd quarter earnings of $0.27 a share at $0.27 a share, which at the time was a record for Atrium. More importantly, our 9 month earnings of $0.91 a share or 18% of last year's record results. And in fact, our 9 months earnings per share are close to what we would normally earn in the full year. In Q3, we decided to increase our loan loss provision to $5,400,000 for the quarter.

Speaker 1

As you know, we've always been proactive in making loan loss provisions. This decision is consistent with the actions of most financial institutions over the last 90 days as well. Indeed, The nature of Schedule A Banks have doubled and tripled their loan loss provisions in the last quarter. The mortgage portfolio increased from 825,000,000 to $876,000,000 quarter over quarter. We had an exceptionally strong quarter of origination, particularly from the Ontario office.

Speaker 1

Atrium now has almost 77% of its portfolio located in Ontario with the balance in Western Canada. Due to reduced activity in real estate markets across Canada, I suspect that HN's loan portfolio will drop to some extent in Q4 Despite our rates being more competitive than ever with institutional lenders, with the rise in industry rates, we've been able to reduce our spread over time and compete more effectively with banks, credit unions and trust companies. This allows us to source higher quality loans, which is critical at this point in the economic cycle. Atrium's total of high ratio loans, that is loans over 75% loan to value, remained very low at $36,000,000 which is equal to just 4% of the total portfolio. Atrient's percent of first mortgages remained high at 95.4 percent and construction loans represent just 7% of the total mortgage portfolio.

Speaker 1

I view construction loans as one of the most risky types of loans today because of ramping cost overruns and time delays. In Q3, the average loan to value of the portfolio was steady at 61% and continues to remain well below our target of 65%. Turning to defaults, we have a few commercial and multi residential loans in the fall from the portfolio, and I'll speak briefly about each of them. The first is the presold project in Sutton, Ontario. The last two phases of this low rise development are scheduled to be registered in November.

Speaker 1

This $2,300,000 loan is forecasted to be repaid in full before the end of the year. The second loan is $19,100,000 Atrium holds the most senior ranking tranche of a $24,000,000 first mortgage with $5,500,000 subordinate tranche held by another lender behind us. The loan is secured by a 5.3 Acres zoned townhouse site located in Markham. The first purchaser failed to waive conditions, and we're working to finalize an agreement with a second bidder. The 3rd loan is in North Vancouver.

Speaker 1

It's a $47,100,000 first mortgage secured by a 4.5 acre site It's fully approved for a mix of multi residential buildings, both rental and condominium, and having a gross floor area of approximately 300,000 square feet. The property was appraised earlier in the year by a respected appraisal firm for $83,000,000 implying a loan to value of 56.7%. We view the appraisal as aggressive in today's market, but the court gave the borrower until mid March 2024 to repay the loan. We anticipate having the legal right to hire a realtor and sell the project by the end of April 2024, if the loan is not paid off by the borrower before that plan. The remaining four loans are located in Greater Vancouver and only recently went into default, in fact, in November 1.

Speaker 1

The loans totaled $34,000,000 and they're connected to a single sponsor. As a result Of ongoing legal proceedings, I'm unable to speak in much detail about the loans, but I'll tell you what I can. The loans range in size from $3,600,000 to 12 $7,000,000 and are secured by low rise development sites, mostly townhouse sites in Langley, Richmond and White Rock, all suburbs of Vancouver. 1 is the construction loan and the other 3 are bridge loans. We are still gathering information at this early stage.

Speaker 1

Defaults in the single family mortgage portfolio totaled $9,900,000 up just slightly from last quarter. These loans have loan to values ranging from 56% to 87%. As such, we don't think there's much, if any, loss exposure on the single family mortgage portfolios. In order to address the weakness in the overall real estate markets and the new defaults in BC, Atrium increased its loan loss reserve in Q3 by $5,440,000 Atrium's loan loss reserve is now a very healthy $17,800,000 which is equal to 203 basis points in the overall mortgage portfolio, up from 150 basis points last quarter and 138 basis points in Q1. Looking ahead, we see the market remaining weak for the next few quarters, And we will proactively increase our loan loss division as needed, which will protect future earnings.

Speaker 1

We forecast that a market recovery should gradually begin by the middle of 2024, when real estate markets have bottomed, inflation has declined and the Bank of Canada has begun to drop interest rates. Turning to our investment properties. At the beginning of Q3, we had 2 foreclosed properties, A 90 unit rental project in Regina and a 4plex in Leduc, which is a suburb of Edmonton. The sale of the Regina apartment closed in Q3 The $13,500,000 our carrying cost was $13,200,000 and the net proceeds of sale resulted in a small profit. The only remaining foreclosed asset is a 4plex in Wadoop, which is carried at 1,100,000 That property is consistently 100% leased and generates between a 4% and 4.5% yield.

Speaker 1

My economic commentary is as follows. GDP dropped dramatically from the Q1. GDP fell 0.2% in Q2 and is forecasted dropping 0.1% in Q3. The Bank of Canada is also now forecasting GDP growth of less than 1% for the next 3 to 4 quarters. Canada's anemic economic performance contrasts with the United States.

Speaker 1

We posted 4.9% GDP growth in Q3. The U. S. Consumer is less leveraged and consequently, higher interest rates are having less impact. The Canadian unemployment rate increased from 5.4% to 5.7% during the quarter, which is consistent with the lack of GDP growth.

Speaker 1

The unemployment rate has increased 4 times in the last 6 months. Inflation rose from 2.8% and it's strained to 4% in August Because of rising energy prices and mortgage costs, but inflation did drop to 3.8% in September and inflationary Pressures appear to be abating. Excluding Food and Energy, CPI in September rose only 3.2% on a year over year basis, and core measures of inflation also slowed to 3.4%. The Bank of Canada is now forecasting inflation of 3.5% in 2024 2% by mid-twenty 25. The Bank of Canada has left its policy rate unchanged since July and appears to be softening its stance on interest rates despite complaining about political intervention.

Speaker 1

The current consensus Turning to the real estate markets and first to commercial real estate markets. Cap rates continued to gradually increase in Q3 Across all markets and sectors, the national average cap rate rose 17 basis points quarter over quarter to 6.45%. Not surprisingly, the office sector had the largest increase in cap rates, while more favored sectors like industrial, retail and multifamily at very small cap rate increases. Indeed, CBRE reported that rental rate growth in the multifamily sector has entirely offset higher cap rates. The Canadian industrial vacancy rate rose by 40 basis points in Q3 to 2.5% from an all time low.

Speaker 1

In Atrium's core markets, the industrial vacancy rate in Toronto rose to 1 0.9% while Vancouver rose to 3%. There's a general feeling that the growth in industrial rates is that or near an end And that absorption will continue to slow down. The Canadian office vacancy rate remained high at 18.2%. Vancouver remains the tightest office market in Canada with an 11.8% vacancy rate downtown and 7.2% in the suburbs. In Toronto, where Atrium has very limited office exposure, the downtown vacancy rate was more elevated at 15.8%, while the suburban vacancy rate was 20.6%.

Speaker 1

Looking at the residential resale market, In the GTA, there were 4,600 resales in October, which was down 5.8% compared to the previous year. On a month over month basis, sales were also down. New listings edged lower on a month over month basis, over 38% above the record low listings of a year ago. The home price index was up 1.4% on a year over year basis, but down 1.7% on a month over month basis. In Metro Vancouver, there were 2,000 resales in October, which was up 3.7% from a year ago, but remained below the 10 year average for October.

Speaker 1

The number of newly listed residential properties in Metro Vancouver Turning to the new home market. The sales of new homes across most of the country. In the GTA, there have been 15,000 new home sales year to date, representing a decrease of 30% when compared to Same period in 2022. High rise sales were down 43%, while low rise sales actually increased 34%. On a month over month basis, new home sales in September 23 were 3 times stronger than last year.

Speaker 1

Unsold inventory in September was up from last year, but remains at a very reasonable level. The benchmark price for high rise and low rise product dropped by 10.5% 15.5% on a year over year basis, partly due to a change in the mix of sales toward much more affordable product. The supply of unsold high rise inventory increased on a quarterly basis from 13,900 units 16,400 units. However, 64% of that inventory is in the presale stage and may never be built. There are only 5 15 unsold units of standing inventory in the GTA and 92% of all units currently under construction have been presold.

Speaker 1

In Vancouver, the Q3 figures are not yet available, but in Q2, Metro Vancouver's new multifamily home sales represented a 66% increase compared to Q1 and are similar to the 5 year 2nd quarter average of sales. Standing inventory of completed move in Ready units at the end of Q2 was 10 10 units, an increase of 4% from the previous quarter. 87% of concrete condominium units released for sale and scheduled to complete on or before 2028 have been presold. Our view is that a material recovery in the new home market will only begin once construction costs have dropped, Inflation has declined and the Bank of Canada has signaled a drop in interest rates. So to finish, Q3 was another good quarter for Atrium.

Speaker 1

We generated earnings per share of $0.91 on a year to date basis, which would normally be close to our earnings per share for a full year. We're on track for the largest special dividend in our history. In addition, we were able to sell our Regina apartment building at a price slightly above our book value, thereby reducing our investment properties to a carrying cost of only 1,100,000 Although the number of defaults in our portfolio increased in the latest quarter, we have dealt with those defaults by providing for an outsized loan loss provision of 5,400,000 It's worth noting that we were able to expense this large provision and still generate solid quarterly earnings of $0.25 a share, a figure which is well above the dividend for the quarter. Today's high interest rates have actually increased our interest margin as opposed to most financial institutions who are facing reduced interest rate margins. My sense is that real estate markets will be soft for another 3 to 4 quarters And the GDP growth will be negligible.

Speaker 1

The good news is that inflation will almost certainly fall during this period And construction starts will plummet, which should lead to a material drop in construction costs. In fact, construction costs have already started to drop Because trades no longer have a backlog of work, the most pronounced drop has been in low rise construction, Our early trades for mid rise and high rise construction have also begun searching for new contracts. I remain confident that our team can manage our portfolio through this cycle. We've been actively managing our existing portfolio to identify weaknesses early and deal with them expeditiously. We have sold subordinate tranches of some higher risk loans over the last 6 months in order to de risk the portfolio.

Speaker 1

We've also increased our proportion of 1st mortgages and kept the portfolio loan to value ratios well below our long term target of 65%. That's it for our comments. Thank you, and we'd be pleased to take any questions from the listeners.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a 3 tone prompt acknowledging requests. Questions will be taken in the order received. One moment please for your first question.

Operator

Your first question comes from the line of Dharav Mathur from Laurentian Bank. Please go ahead.

Speaker 2

Thank you and good afternoon everyone. Just looking at the Stage 2 loan increases this quarter, One contact but noted that it's coming from the high rise, mid rise and the housing and apartment segment. As you look at the next 12 to 18 months, do you Has the one segment fair worse than the others?

Speaker 1

Well, those I think those segments you mentioned represent 90% of our portfolio. So it's not Surprising that they will be coming from those segments, but our view is resales are probably going to be the steadiest Because they're smaller in loan amounts, much more trading. I was surprised to see the low rise sales in new homes actually go up. It was probably from a low base the year before because the general feeling is that Affordable product is selling okay, but more expensive product is where our sales are really slow right now. And you sort of think of low rise, not so much townhouses.

Speaker 1

The townhouses are sort of the most affordable part of Hello, RISE sector. But detached and semi detached, you would think would be pretty slow right now. Similarly for condominiums, mid rise and high rise, the expensive Condominiums are the ones that are selling slowest. And if you look at the launches that have been successful this year, They're almost all affordable. In fact, I saw something this morning from a client It said the average was something like $11.75 a foot, with the average of the most Launches this year, and that would be well below the average price of a launch in the GTA.

Speaker 2

Okay, great. And then just switching gears here to your prepared remarks on construction financing, Do you foresee some sort of a pullback as far as construction lending is concerned given the volatility in the commercial real estate sector?

Speaker 1

Well, it may be getting better now. If you're in the midst of a construction loan, it's tough. But as I mentioned in my remarks, There is evidence that trades are much more reasonable in their pricing. They don't have The huge backlog of work that they once had where they were just pricing at whatever they wanted and developers needed to go forward with their projects, so You have to accept those prices. Now because of much fewer launches And because of sales launches, particularly smaller players, I think trades for Good quality developers who they know will succeed and get through their presales.

Speaker 1

I think they're getting really good quotes right or they're starting to get really good quotes right now, particularly in low rise, but it will happen in high rise as well. Our rates just take longer to build. So in my remarks, I said that you're seeing price drops in the early trades like forming Because they're the ones that are finishing up right now and don't have the big backlog, the finishing trades in high rise and mid rise just Probably still have 2 or 3 years of good times ahead of them. So a lot of developers aren't fixing those costs right now. They'll worry about those costs later on, They know they're coming down.

Speaker 2

Okay. Great. Well, thank you for the color. I'll turn it back to the operator. Okay.

Operator

Thank you. And your next question comes from the line of Razeep Banjee from TD. Please go ahead.

Speaker 2

Good afternoon. Thanks for the question. Rob, if I could start with the default state view, I think your commentary last quarter was that it should be paid off by the end of the year, but I understand you're working with a new buyer here. Is that same time line reasonable or should we expect it to be a bit more pronounced?

Speaker 1

Yes. No, they wasted, unfortunately, 16 days of our time. So We're close to signing a deal with a second bidder. There are quite a few bidders actually, but we've identified 1 and we're going back and forth, Finishing an agreement of purchasing sale with a second bidder, and that one would close Before the end of Q1, but not in Q4. But by the time we present to you, If they go forward, I think we'd know whether they're firm or not.

Speaker 2

Okay. Understood. And then had a few, I guess, reconciliation questions on the default. So, dollars 22,700,000 of Stage 3 Loans? Are those part of the 4 loans in Greater Vancouver that just recently went into default?

Speaker 1

So part of it is and part of it are other loans.

Speaker 2

Okay. So it's a mix of

Speaker 1

Stage 2 and 3, I would say more of them are in Stage 2 right now, majority.

Speaker 2

Got you. Understood. And on the PCLs, I appreciate you took a large provision this quarter. I was going over your allowance schedule. I I don't think you've actually taken off any write offs this year.

Speaker 2

I just wanted to confirm if that's correct. And second, do you expect to take Losses, whether or write offs, whether it be principal or accrued interest on any of these loans?

Speaker 1

So We haven't taken a write up in a long, long, long time, many years. We've been building this up. I mean, the definition of Stage 3, and I'll let John correct me if I'm wrong, is there is concern about impairment. So yes, we think that there'll be some impairment, not overly significant. And if you look at our $17,800,000 overall provision, 148 basis points is actually allocated to Stage 1.

Speaker 1

Just to give you a sense of how we view the market has changed, I think at the beginning of COVID, our whole Loan loss provision added up to something like, was it 74 basis points or something. So We have doubled the provision just in the stage 1, which is the lowest risk portion of the portfolio. We have doubled the provision in Stage 1 that we had in the entire portfolio at the beginning of COVID. That shows you that We're trying to be conservative and that we've taken much bigger provisions to reflect the weaker market. I'll just confirm for you as well, Rupi, that we have not written off anything year to date.

Speaker 1

Like you know, as Rob mentioned, we've built up our provisions for specific loans in specific situations. But once we reach a point in the process where we settle, that's So we would proceed with the write off, but presumably since we are providing, there would be much of a commission impact assuming our

Speaker 2

The upcoming debenture in June of next year, what are your plans for that are you planning on refinancing it or maybe leaning on your credit facility to rates come down?

Speaker 1

So right now, we have $100,000,000 available in our line of credit. So We love it if the convertible market opened up, convertible debenture market opened up, but the Only parties who have done it have paid a very high coupon that we're simply not willing to pay. Our preference would be if we could get a rate that we could be comfortable with to do it in the capital markets, But assuming it isn't, and that's sort of what we budgeted for by leaving lots of liquidity, then we'll just pay it off in the line of credit.

Operator

Thank you. Mr. Gudel, There are no further questions at this time. Please proceed.

Speaker 1

Okay. Thank you very much for attending our conference call. And For those of you who are shareholders, I appreciate your continuing commitment to the company. Have a good day.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.

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Key Takeaways

  • Record YTD EPS of $0.91 per share (vs. $0.77 last year) and Q3 EPS of $0.25, exceeding the Q3 dividend of $0.225.
  • Atrium’s mortgage portfolio reached a record $876 million with a portfolio rate of 11.49%, driven by 89% floating-rate exposure and quick-reprice 12-month term loans.
  • Mortgage loss provisions rose as Stage 2 loans increased from $77 million to $109 million and Stage 3 loans reached $23 million, bringing the total loan loss reserve to $17.8 million (203 bps).
  • Originations doubled to $115 million in Q3, while facility borrowings remain prudent at $208 million and convertible debentures of $157 million stagger maturities, ensuring strong liquidity and low leverage.
  • Management expects continued market weakness over the next 3–4 quarters but anticipates a mid-2024 recovery as inflation eases and interest rates decline, with a focus on active risk management and de-risking.
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Earnings Conference Call
Atrium Mortgage Investment Q3 2023
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