Atrium Mortgage Investment Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 4, 2023

There are 3 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Atrium Mortgage Investment Corporation Second 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 Friday, August 4, 2023. I would now like to turn the conference over to Rob Goodall, CEO.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and thank you for calling in today on Friday morning before a long weekend. We actually have A lot of people on the line, which is nice to see. Our CFO, John and Matt, will start by talking about our financial results, And then I'll speak about our performance from an operational and portfolio perspective. John? Thanks, Rob.

Speaker 1

Atrium reported very strong financial results for the Q2. Our net income of $14,400,000 was a quarterly record and is up 35% year over year. Our earnings per share of $0.33 matched our public company records posted this past Q1 and is up 32% from the $0.25 posted in the prior year quarter. These financial results were driven by a slight contraction in the mortgage portfolio over the quarter being more than offset by a higher rate on the portfolio and steady operating expense levels. Market conditions continued to remain slow in the quarter, resulting in $62,600,000 of principal advances, which were more than offset by $86,600,000 of repayments, Both metrics being very similar to what we experienced in Q1.

Speaker 1

That being said, we have seen a lot of good quality deals start to queue up in the later part of the quarter, Many other vendors stay on the sidelines. The portfolio rate of 11.27 percent at quarter end results are a record. This is up from 11.44 percent last quarter and 10.77% from the beginning of the year. The quarterly increase was driven mainly by the 25 bps rate increase in the overnight rate instituted by the Bank of Canada on June 7. The percentage of the portfolio priced stop loading rates has also continued to increase.

Speaker 1

It was 84.6% at quarter end, is up from 75.4 percent at the beginning of the year. While these factors ultimately drive our higher portfolio rate, One factor nudging in the other direction is the fact that our new originations on our multifamily loans in particular are on average coming in below our average portfolio rate. This is by design as the business continues to focus on higher quality, low risk deals given market uncertainties And less competition in the market. Our funding profile remains stable at quarter end with plenty of capacity on our credit facility. The average rate on our credit facility was 6.96% during the quarter relative to 6.72% last quarter due to the primary increase from the Bank of Canada instituted dispatch on June 7.

Speaker 1

The facility was down $28,400,000 over the quarter to $178,500,000 which is consistent with our portfolio movement. This balance represented just 21.5% Total funding sources. Our other funding sources are not based off loading rates, include our capital base of $489,000,000 Our alliance for mortgage losses increased this quarter by $600,000 to $12,300,000 which represented 1.50 percent of the mortgage portfolio It's up from 1.38% in the previous quarter. We had no Stage 3 or impaired loans at quarter end, so our reserve is entirely for Stage 1 and 2 loans. During the quarter, loans in Stage 2 increased from $37,300,000 to $77,100,000 were from 4.4% of the portfolio to 9.4% of the mortgage portfolio.

Speaker 1

This increase was really driven by 1 larger loan in the Vancouver area That went into Payment arrears. The collateral securing this loan is in a very desirable location, and we believe that we are well secured. Reserves on our Stage 2 loans are determined on a loan by loan basis. Our Stage 1 reserves are developed using our expected credit loss model And increases in the quarter were driven by key macroeconomic factors, including GDP growth, unemployment and home prices, which are all expected to weaken. The prolonged economic slowdown increases the probability of defaults and losses as borrower run the risk of depleting funds.

Speaker 1

Management continues to believe that the company continues to operate in a higher risk environment given the impact of higher rates and inflation as well as a lack of liquidity in the market. Overall, we are very pleased with our 2nd quarter financial results, which managed to top our record Q1 earnings. Our Q2 EPS of $0.33 is the highest of our public peer group for the past 9 quarters now. Earnings per share for the 1st 6 months of the year of $0.66 are pacing well ahead of the $0.50 posted in the 1st 6 months of the prior year as well. Higher benchmark rates, successfully maintaining a high portfolio balance containing our operating expenses inclusive of loan loss provisions, All support record earnings posted in 2023 thus far.

Speaker 1

But despite our strong earnings performance to date, We recognize that we are operating in an environment with elevated credit risks due to economic uncertainties in a sluggish real estate market, So our focus continues to remain primarily on risk management. That being said, we remain cautiously optimistic about our growth prospects for the balance of the year. Rob, I'll pass it back to you. Thanks, John. We enjoyed another very successful quarter.

Speaker 1

As John said, Atri and Nick matched last quarter's record earnings of $0.33 a share and our 6 month earnings of 66 Percent per share is 32% ahead of last year's record result. To my surprise, our average mortgage rate Did increase by 23 basis points to another record in Q2, mostly due to the 1 quarter of 1% change in the prime rate of interest on June 7. The short duration of our loans has allowed us to pivot quickly to floating rates. Approximately 85% of our loans are now floating That directly benefited from the increase in the prime rate of interest. Atrium's average mortgage rate rose to 11.27% From 11.04 percent last quarter despite the fact that we reduced spreads on some of our highest quality loans after renewal.

Speaker 1

Overall, the portfolio reduced from $846,000,000 in Q1 to $825,000,000 this quarter. New loans of $63,000,000 were similar to the volume of new business in Q1. Although the pipeline was robust throughout the quarter, Several new loan opportunities failed to close and others took longer than expected to fund. Meanwhile, loan repayments of $87,000,000 were higher than we anticipated. This level of repayments is quite surprising and is reflective of the quality of our portfolio.

Speaker 1

For the quarter, 83% of the new Funded loans were from Ontario and 17% from BC. We're seeing a lot of good opportunities And the loan portfolio is $25,000,000 higher today than it was at quarter end. With the escalation of interest rates, We've been able to reduce our spread over prime and compete more effectively with banks and trust companies. This allows us to source higher quality loans, which is particularly critical at this point in the economic cycle. Despite the overall weakness in the real estate market, The portfolio is holding up reasonably well.

Speaker 1

The $1,500,000 Calgary loan, which had been in default for a long time, With a repaint in full in Q2 and both the $18,500,000 first mortgage to SafeVIEW and the $2,500,000 loan In Sutton, it looks like they will close before year end. The only damage on the portfolio, therefore, is a large first mortgage in North Bend, which went into default on June 1. We do expect a full recovery in this loan, but the legal process in BC is slower than Ontario, So it will likely take 9 to 12 months to realize on our securities. The portfolio strength It's further exemplified by the low amount of high ratio loans, that is loans greater than 75% loan to value, Which was only $17,000,000 in Q2, down from $31,000,000 last quarter. As a percentage of the portfolio, High ratio loans account for now only 2.1% of the portfolio, down from 3.7% last quarter.

Speaker 1

There's only one high ratio commercial loan, commercial and multi residential loan, which has a 78.9% loan to value. This is the 2nd mortgage to a major developer and we've always viewed this loan as having a low risk profile. The balance of the high ratio loans are single family mortgages, which totaled $9,600,000 The loan to value on these single family mortgages range from 75.9% to a high of 91%. Lastly, in Q2, the average loan value of the portfolio decreased marginally from 60.8% last quarter to 59.8% this quarter and continues to be well below our target of 65%. Turning to our operations, the geographic composition of the portfolio is now 75.4 percent in Ontario, 23.7 percent in BC and 0.9 percent of 1 percent in Alberta.

Speaker 1

We are comfortable with this geographic allocation. Atrium's percentage of 1st mortgages hit a record high of 96.2%, up from 92.5% at the end of 2022. Ontario and D. C, each have more than 95% of their respective loan portfolios in 1st mortgages. We're currently underwriting a couple of second mortgage opportunities, so Atrium's first mortgage percentage will likely dip Slightly in Q3.

Speaker 1

The percentage of construction loans remained low at 7.25 percent of the total portfolio And our average loan to value on construction loans was a modest 62%. Given the difficulty of Controlling construction costs and time frames to completion, we feel a conservative level of exposure to construction loans continues to be appropriate at this time. Turning to defaults. There were 3 commercial loans in defaults representing 8.1% of the portfolio. The first is the presold project in Sutton.

Speaker 1

This loan was substantially paid down during the quarter from $7,800,000 Down to $2,200,000 Phases 1, 2 and 4 have all closed of the Cyphase project. Atrium's remaining collateral consists of Phases 35 as well as a 6 acre school site and a small commercial block. Atrium's loan to value is only 40.8%, excluding letters of credit and 80.4% Those letters of credit were fully cash collateralized. So we don't see we do not foresee a loss. Site servicing at the last two phases will be complete by the end of Q3 and registration is anticipated to occur before the end of Q4, at which time this loan will be repaid in full.

Speaker 1

The 2nd commercial loan in default is the SafeVIEW loan of 18,500,000 Atrium's also no senior ranking tranche of a $24,000,000 first mortgage with $5,500,000 with a $5,500,000 subordinate tranche held by another lender. The loan is secured by a 5.3 acre redevelopment site located northwest of the intersection of Macauan Road and 14th Avenue in Markham. Planning applications were submitted for 84 townhouse units And Citi approval was reported to the inlet prior to the event of default. After nonpayment of interest Due on April 1, we quickly engaged a litigation lawyer and the courts appointed a receiver on May 2. Atrian and the receiver interviewed 4 prominent Realtors and Cushman and Wakefield was hired.

Speaker 1

The property was listed for sale, And we will be evaluating purchase offers over the next few weeks. We expect this loan will be repaid by year end. The last and third commercial loan in default is a $46,000,000 first mortgage. The loan went into default on June 1. It's a 4.5 acre site with some revenue from existing improvements.

Speaker 1

The site is fully approved by City Council for a mix of multi residential buildings, having a gross floor area of approximately 300,000 Square Feet. The property was recently appraised by a well known and respected appraisal firm for $83,000,000 implying a loan to value of 55.4 percent. Although we view the appraised value as possibly optimistic in today's market, We do not believe Atrium will suffer any loss. Defaults in the single family mortgage portfolio totaled $8,100,000 It's down $500,000 from last quarter. Several of these loans are only in technical default due to realty tax arrears.

Speaker 1

Overall, we're pleased with the performance of the portfolio. We analyze and risk rate each loan every quarter to stay close to any emerging risks. The overall portfolio risk rating changed little from Q1 to Q2. Turning to loan loss provisions. We increased Atrium's loan loss provision as we have since the beginning of COVID.

Speaker 1

We increased it in Q2 by $690,000 to reflect the increased risk of real estate markets overall. The loan loss reserve is now equal, as John said, to 150 basis points on the overall portfolio, which is up from 138 basis points last quarter. In fact, we have doubled our loan loss reserve since the beginning of the pandemic when it was 74 basis points. The loan loss reserve continues to have no Phase III allocations, meaning no impaired loans. Turning to foreclosures.

Speaker 1

We continue to have 2 foreclosed properties, a 4 Flex in Leduc and the second is a 90 unit rental project in Regina. The carrying cost of these assets is $14,300,000 While we do 4plex is carried at $1,100,000 The property is consistently 100% leased and generates between a 4% and a 4.5% yield. The Regina apartment has a carrying cost of $13,200,000 and is under contract to sell. In fact, the purchaser has waived all conditions And closing is anticipated to occur before the end of Q3. We estimate that the net proceeds will be approximately equal to are carrying value after adjustments in closing costs.

Speaker 1

My economic commentary is as follows: SaaS can estimate GDP growth slowed to 1% in Q2 after a much stronger GDP growth of 3.4% In Q1, the growth slowed as the 2nd quarter progressed with the early forecast for June at minus 0.2%. The Bank of Canada is now forecasting GDP growth of 1.8% for the year as a whole. However, the second half of 'twenty three is expected to be much slower than the first half. The job market remains strong with unemployment increasing by 60,000 jobs in June, The unemployment rate actually ticked up to 5.4% from 5.2% in May because of record setting population and labor force Fortunately, inflation kept dropping over the quarter to 2.8% in July Versus 4.3% last quarter and 8.1% at its peak. It's the first time in 2 years The inflation rate is in line with the Bank of Canada target of 1% to 3% inflation.

Speaker 1

Much of the easing is explained by lower energy prices, which were 22% lower than a year ago. The consensus among economists is that the Bank of Canada will not increase its overnight rate from about 5% at its next meeting on September 6. But the Bank of Canada does expect inflation to remain around 3% for the next 12 months before declining to its 2% target by the middle of 2025. Unfortunately, that forecast means that interest rates are likely to stay high for a longer period of time, probably until the end of Q1 or Q2 of 2024. Turning to commercial markets, real estate markets, cap rates continued their ascent and rose another 25 basis points in Q2.

Speaker 1

The national average all properties cap rate is now 6.28%. Industrial cap rates have risen 90 basis points over the last year, while apartments have increased just 25 basis points. Both markets remain very strong. The industrial marketing in Vancouver and the GTA have availability rates of just 2.4% and 1.4%, respectively. However, in sign that the industrial sector may have peaked, net absorption in Q2 was down significantly in both cities versus the prior quarter.

Speaker 1

The office market, as most of you know, continued to be very weak across Canada with an average vacancy rate of 18.1% in Q2. Vancouver has the lowest vacancy rate in Canada at 9% and the GTA has a 17.9% vacancy rate. Atrient continues to have very limited exposure to the office sector. Looking at the residential resale market. In the GTA, resales in June were 16.5% above last year, but 7% below last month.

Speaker 1

The number of new listings and active listings We're down 3% 12%, respectively, on a year over year basis. And the average selling price is up 3.2% And the benchmark price is now down as of June was down only 1.9% on a year over year basis, And that compares to 12.1% last quarter, so there's been a huge shift. Similarly, in Metro Vancouver, Resales in June were up 21% from last year, but 12% below last month. Total listings increased 7.5% from last month, but they're still 8% below last year and 17% below the 10 year average. As a result, Vancouver's June benchmark price increased by 1.3 month over month And is now only 2.4% below last year at this time.

Speaker 1

And again, it's down 2.4% year over year. Last quarter, it was down 7.4% year over year. So Big improvement in the resale market on both. And then in the last two days, both the GTA and the Vancouver Real Estate Board Announced July's resales results and the benchmark price rose a further 0.6% in Vancouver and 1.1% in the GTA. In both cities, sales were up year over year again, but again fell on a month over month basis and are still below the 10 year average.

Speaker 1

Turning to the new home market, despite a spike in sales in June, it's been a slow first half of 'twenty three In the GTA, new home sales decreased by 42% when compared to the same period in 2022 And the average price of high rise sales and low rise sales saw year over year declines of 8.4% and 6.9%, respectively. Fortunately, the amount of inventory in the GTA on the market remains low. The supply of unsold high rise inventory in the GTA decreased Slightly in Q2, the 14,500 units, of which 61% are only in the presale stage and won't get billed unless they each achieve The 70% to 75% presales threshold necessary for construction financing. Further, There are only 401 units standing inventory and 92% of all units under construction in the GTA have been presold. In Vancouver, the Q2 figures are not yet available, but the trend in Q1 was higher sales than the previous quarter, but still well below the 5 year average.

Speaker 1

In Q1, the level of unsold inventory also increased. To summarize, the retail markets are improving faster than the new home market in both GTA and GBA, price gap between retails and new loan prices needs to continue to narrow. More specifically, we will need further price appreciation in the resale market and reduce interest rates before we see a significant recoveries In the new home market, are these just my opinions? To finish, Q2 was another strong quarter for Atrient, both from an earnings and portfolio perspective. And our pipeline of new loans suggest that Atren's mortgage portfolio should increase in Q3, although forecasting is difficult because of the short duration of our loans.

Speaker 1

Positive developments in Q2 Included the progress made in valuing and listing the safety of Canada site for sale, being substantially paid down on the Sutton loan from $7,800,000 to 2,200,000 Being paid out in full on a property loan in Alberta and firming up the conditional sale of the Regina apartment building at a price approximately equal to our cost base. We expect that the balance of 2023 will be challenging for the real estate industry as a whole. A drop in short term interest rates is probably the most important change Needed

Speaker 2

to improve the real estate market.

Speaker 1

In the meantime, we're actively managing our existing portfolio to identify weaknesses early And deal with them expeditiously. With 5 managing directors having more than 18 years of lending experience and 3 of us with more than 30 years of experience, We do have the necessary experience to deal with economic slowdown. Thank you, and we'd be pleased to take any questions from the listeners.

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. The question in the queue comes from Steve Behar from TD Securities. Your line is open. Please proceed.

Speaker 2

Thank you. Good morning, guys. If I could just start on the credit side. So Good update to hear on Stateview. I guess, out of curiosity, given that there is a receiver in place, why would Stateview not be classified as a Stage 3 loan versus a Stage II loan.

Speaker 1

A Stage III loan is only if a loan is impaired. And I mean, it's too early for us to know, but based on appraisals and feedback from 4 different realtors who we in the receiver interviewed, It appears as though there'll be no impairments of the asset on the loan. So let's see if I can add some more color to it. So we would classify a loan in Stage 3, once we have objective evidence of an impairment, right, that's a it's a pretty that's a standard in IFRS and that's what we follow. Just like any loan, we collect information, we make our best estimates based on what we have.

Speaker 1

As we move through this process, we'll get more information and And classify accordingly. So that's how we look at it. Okay.

Speaker 2

That's fair. Just as an extension to that question, so your Stage 2 loans at $77,000,000 right now, they are Higher than over the last 2, 3 years, I believe. What's your comfort level or outlook here for Any of these loans moving to Stage 3? Or how confident are you that these would result without going into impairment?

Speaker 1

So I mean, it's a business meeting because 70% of Stage 2 is 1 loan. So actually, the portfolio quality actually improved during Q2. So We feel pretty good about the portfolio. Unfortunately, a large loan did go into arrears. It appears as though at 55% Along the value, we're okay, but it skewed the numbers.

Speaker 1

Okay. Yes. Thanks,

Speaker 2

Fred. And just the last question on the trade side. Would you be able to share your outlook On provisioning for the balance of the year, given where interest rates are and where the real estate market is, I guess, would you be looking to keep on increasing allowances over the near term?

Speaker 1

That's what we've been doing, like the overlay of The overall market, in our view, as long as industry rates stay high, the market risk Stays elevated. So that's why we've been adding to loan loss reserves, not because of specific loans where we see impairment. So depending on how the rest of the year unfolds, we'll continue Probably increasing the loan loss reserve, but I can't see it coming down. But we sort of have to play it by year, would you say, John? Yes, I agree.

Speaker 1

Not by ear. We have to play it by facts. Yes, yes. It's like asking that question. It's like asking us to predict the economic outcomes in the Sure.

Speaker 1

So it's very difficult. We make the assessment every single quarter looking at macroeconomic variables. We look at play close attention to what the big banks are doing, their models, and how that impacts our specific borrower base. So It's certainly been our perspective over the last few quarters when you take this all in that there is heightened credit risk and we haven't moved up. So you can see it in our numbers, but We make that formal assessment every quarter.

Speaker 1

Unfortunately, we started early. As I mentioned In my speech, we've gone from 74 basis points at the beginning of the pandemic to 150 basis points. So we We kept adding to it, but we can't say for sure we'll be adding to it and certainly can't say what the quantum is because we have to see what the evidence is at the end of next quarter. Yes, that's fair. If I could

Speaker 2

just sneak in one last question. On your weighted average mortgage rate, I understood that like 86% of your portfolio is floating right now that on the other end, clients would be There's an increase in pressure with higher rates and everything. And you mentioned that you've reduced spreads and some of your higher quality borrowers. I guess Balancing all of that together with another rate hike that happened in July, would you expect your mortgage rate to maybe, I don't know. Has Pete doubled as well?

Speaker 2

Or is there a little bit more room here to move higher? Are you going to come lower if you're receiving higher even more high quality borrowers?

Speaker 1

So I showed how bad I am in predicting last quarter when I thought the rates wouldn't move up and they did. And in fact, they went up 23 basis When prime went up 25%, which I never would have guessed would have been that close to the prime rate increase, especially as 15% to 16% of our book is fixed, so it wouldn't have gone up. So I was surprised by the numbers. I think the fact that the rates went up a quarter point in early July, can't remember exactly what day it was, but in July, I'd be surprised if our rates don't move up a SMIC in Q3. So maybe some renewals will have lower Fred, John is nodding his head, so he agrees.

Speaker 1

So some renewals will have lower spreads, but the new business And the existing business on the books will increase. Yes. I mean, in Q2, what was interesting is that Yes. You'll see in our disclosures, our housing and apartment category there in particular, there was a lot of repricing upward in those loans because We originated a lot of single family loans in the first half of twenty twenty two. These are one year loans and Those reprice in the quarter, so we actually that actually drove it up higher, I think, than what we expected, like we were 23 bps, Priming up 25.

Speaker 1

If you exclude that impact, that we probably would not have been probably 5 or 6 bips or so. Yes, that's a good point because some of those Some of those single family loans went from what, dollars 6.99 to $9,000,000 dollars 9. Dollars 7. Yes. That is a little bit of a factor.

Speaker 1

Behind the scenes, I kind of push it up. But so I think the safe thing to assume would be The very safe thing to assume would be the rate stays the same, but I think it will actually move up a little bit. Yes.

Speaker 2

Okay. That's it. Thanks for your time.

Speaker 1

Thanks.

Operator

There are no further questions in the queue at this time. I'll turn the call back over to Bob Riddell for any closing remarks.

Speaker 1

Okay. Thanks for all attending this morning on Friday before a long weekend. We actually have almost a record level of attendance today, so That's good to see. And I hope you're pleased with the results. We think we're doing really well in difficult environment and navigating it Well, we've managed to do that in the 2,008,009 where we didn't lose any money at all during that difficult time.

Speaker 1

This is a little more protracted. So we're trying to be as careful as we can. And we're as mentioned before, we've been moving up our loan loss provisions In anticipation that we could have losses at some point in the future, but we feel pretty good about the portfolio right now. So thanks again. I appreciate you attending on a Friday morning of a long weekend.

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Atrium Mortgage Investment Q2 2023
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