Atrium Mortgage Investment Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 9, 2024

There are 3 speakers on the call.

Operator

Ladies and gentlemen, please standby. Your conference is about to begin. Welcome to the Atrium Mortgage Investment Corporation's Second Quarter Update Conference Call. At this time, all lines are in listen only mode. Later in the call, we will conduct a question and answer session.

Operator

A reminder that this conference is being recorded Friday, August 9, 2024. Certain statements will be made during this phone call that may be forward looking statements. Although Atrium believes that such statements are based upon reasonable assumptions, actual results may differ materially. Forward looking statements are based on the beliefs, estimates and opinions of Atrium's management on the date the statements are made. Atrium undertakes no obligation to update these forward looking statements in the event that management's beliefs, estimates, opinions or other factors change.

Operator

I would now like to turn the conference over to your host, Robert Goodall, CEO of Atrium. Mr. Goodall, please go ahead.

Speaker 1

Thank you, and thank you to the listeners 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?

Speaker 2

Thanks, Rob. Atrium continued to generate another strong quarter for shareholders. Earnings per share was $0.26 for the 2nd quarter, which is relatively consistent with the $0.27 posted in Q1 and $0.27 posted this past Q4. On a year to date basis, the business generated $0.53 of earnings per share, which is pacing well ahead of our fixed dividend rate of $0.45 Q2 earnings performance was driven by an increase in our mortgage portfolio balance to a record $907,800,000 which is up from the previous record of $893,600,000 at the beginning of the year and significantly higher than prior year levels of $824,600,000 in Q2 of last year. Quarterly growth was driven by $96,000,000 of principal advances, which exceeded $78,100,000 of repayments, Despite slow real estate market conditions, which has put a lot of capital on the sidelines, the company has been able to identify and close high quality loan opportunities in our targeted sectors.

Speaker 2

This also includes a continued emphasis on single family mortgages, which represented about 1 5th of all fundings in the quarter. Increase in the mortgage book, however, was offset by a lower rate on our mortgage portfolio and a higher provision for mortgage losses. The mortgage portfolio ended the quarter with a rate of 10.93% compared to 11.25% at the end of Q1. This rate decrease was largely due to the Bank of Canada rate drop of 25 bps on June 5 as 87% of our mortgages are floating. This was the 1st rate decrease since they embarked on a campaign to raise rates over 20222023 to combat inflationary pressures.

Speaker 2

Now as we know, subsequent to quarter end on July 24, we had another 25 bps rate decrease. While the rate decrease is the main driver of our lower mortgage portfolio rate, the other driver was the focus on lower risk mortgages, including single family residential loans. Overall, the balance sheet remained in a very low leverage position at quarter end with total on balance sheet debt of 44.6%. Our funding sources continue to include a mix of equity capital, convertible debentures and our credit facility. We did have 1 debenture totaling 25 $300,000 mature on the last day of the quarter, which actually fell on a weekend, and we subsequently paid off the balance on the stipulated due date, which was the 1st business day following the month end using our credit facility, which has ample capacity.

Speaker 2

Also during the quarter, we amended our credit facility to add Royal Bank to the lending syndicate and increased the maximum available amount from $315,000,000 to $340,000,000 We now have 4 of the top 6 financial institutions as part of the lending syndicate, which reflects the high quality consistency of our business model. At quarter end, the variable rate credit facility represented 25.1% of total funding and will benefit from any further rate drops as it is priced off prime and short term benchmark rates. During the quarter, we booked a $4,400,000 provision for mortgage losses, which was largely attributable to mortgages that were already classified in Stages 23. Our total mortgages in Stages 23 actually decreased quarter over quarter from 15.5 percent of the mortgage portfolio to 14.8 percent and we did not add any new significant commercial or multifamily mortgages to Stages 2 and 3. There was, however, some or migration of existing loans from Stage 2 to Stage 3.

Speaker 2

At quarter end, our provision totaled 3.23 bps of the mortgage portfolio, which is up from 281 bps in Q1. 105 bps of this total is related to our general or Stage 1 reserve, which remains elevated due to soft macroeconomic outlook. Management believes it is prudent to recognize higher credit risk where warranted. And after a detailed review of loans classified in stages 23, a higher provision was deemed necessary given soft conditions in the real estate markets. Overall though, management remains very pleased with our results to date, especially given the challenging market conditions.

Speaker 2

We continue to post consistently strong results despite these headwinds. Our focus remains on building a resilient mortgage portfolio, proactively managing credit risk on new and existing loans, ensuring that we have adequate funding and liquidity in place and maintaining a strong balance sheet that is well capitalized. Rob, I'll pass it back to you for portfolio and business updates.

Speaker 1

Okay. Thank you. As John said, we had another strong quarter. Atrium generated basic earnings in Q2 of $0.26 per share and our earnings per share of $0.53 for the first half 2024 is one of the strongest years to date in our history. We've increased our loan loss provision in Q2 to $4,370,000 as John mentioned, versus $3,850,000 last quarter.

Speaker 1

This provision is consistent with past guidance we've given. The quarterly provisions will remain elevated until there's a clear turnaround in the real estate markets. As you all know, we've been proactive in making loan loss provisions, which will protect future earnings. Overall, the portfolio increased from $886,000,000 last quarter to a record $908,000,000 this quarter. Loan advances were surprisingly strong at $96,000,000 and loan repayments were $78,000,000 Total loan advances $174,000,000 for the first half of the year, up 35% from last year.

Speaker 1

This volume of new business is a testament to the strength and depth of the loan originators at CMCC, particularly the Ontario office, which has funded the bulk of the new loans. The single family and commercial sectors have been gradually increasing over the course of 2024, which is consistent with our business plan. Atrium's average mortgage rate dropped from 11.25 percent last quarter to 10.93% in Q2, mostly due to the drop in prime on June 5, 2024. Atrium's total high ratio loans, that is loans above 75% loan to value, remain low at 10.5% of the total portfolio. The small increase from last quarter was mostly due to a new loan that we funded to a Tier 1 developer, which was underwritten at 79% loan to value for an apartment rental development in Vancouver.

Speaker 1

There are 5 high ratio loans in the commercial and multi residential portfolio and $10,200,000 of high ratio single family loans with loan to values ranging from 75.4% to 93.7%. In Q2, the average loan to value of the portfolio was stable at 64.4%, which continues to be within our desired range. Atrium's percentage of first mortgages in Q2 remained stable at 96.8%, and construction loans were also unchanged at only 4.8% of the total mortgage portfolio. We still view construction loans as a risky type of loan today because of the frequent time delays, which result in significant cost overruns. Turning to defaults, similar to Q1, there were no new commercial or multi residential loans in default in Q2.

Speaker 1

I'll briefly describe each of the loans. First is the Markham Townhouse site with Stateview Homes. A court decision is pending on the $1,500,000 balance which was held back by the receiver at closing. That's all that's outstanding at this point, the 1,500,000 dollars The pre construction purchasers appealed a decision which would have seen them lose their deposits. The receiver and our lawyer believe the appeal has little chance of success because Tarion, the warranty provider, is responsible for any repayment of lost deposits up to $100,000 Indeed, Terion has already started to pay out purchaser claims and is gradually reducing the potential losses is to a negligible amount.

Speaker 1

The second loan is a large loan of $50,000,000 in North Vancouver. This is a 4.5 acre site that's fully approved for a mix of multi residential buildings, having a gross floor area of approximately 300,000 square feet. The site is listed for sale and there's been strong interest in the property. We are in active negotiations with 2 potential buyers and we should be able to provide more detail on this loan by the end of next quarter. The next loan is a condo inventory loan in Vancouver.

Speaker 1

This loan was secured by 22 newly completed condominium units with an estimated liquidation value of $25,000,000 The loan balances dropped sharply from $20,500,000 at the beginning of the year to $12,500,000 at the end of Q2 as a result of 10 of the condo units being sold. In addition to the remaining 12 units of condo inventory, we also have an assignment of a $10,500,000 first mortgage on a parcel of land appraised at $29,000,000 So we estimate Atrium's overall loan to value at only 50% and definitely do not expect to incur a loss. The remaining four loans are located in Greater Vancouver and total $40,500,000 and they are 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 will say what I can.

Speaker 1

The loans range in size from $3,850,000 to $13,800,000 and all are secured by low rise development sites, mostly townhouse sites in Langley, Richmond and White Rock, BC. 2 of the properties have been listed for sale and one has a firm purchaser, while the other is in the midst of negotiating a sign back. We expect to have the legal right to sell the final two properties by the end of Q3. We believe that we have potential impairment on a few of these loans, but that we made adequate specific provisions for these loans over the last 9 months. As mentioned earlier, we increased Atrium's loan loss reserve in Q2 by 4,370,000 dollars versus $3,850,000 last quarter.

Speaker 1

Our increased loan loss reserves are consistent with the actions of the big six Schedule A Banks who have increased their loan loss reserves by average of 52.7% on a year over year basis. Atrium's loan loss reserve now totals a very healthy $29,300,000 equal to 323 basis points on the overall mortgage portfolio. This is up from 281 basis points last quarter and 150 basis points just 1 year ago. It's worth noting that we continue to have a large general reserve equal to 105 basis points against our highest quality stage 1 loans, which should reinforce the notion that our loan provisioning is very conservative. As a result, we strongly believe that we have adequate provisions in place, which will protect profits for the future.

Speaker 1

My economic commentary is as follows. Canada's GDP increased by 0.2% in May and 0.3% in April after growth stalled in March. Statscan has a preliminary estimate for June of 0.1%. GDP rose by 1.7% and 2.2% in the 1st two quarters and the forecast by the Bank of Canada is 1.2% for 2024 as a whole. In contrast, the U.

Speaker 1

S. Recently announced that the U. S. Economy grew by 2.8% in Q2. The Canadian labor market has also been soft with the unemployment rate increasing by 1.4% since 2022 to 6.4% today.

Speaker 1

Canada's labor market contrasts with the U. S. Where the unemployment rate is much lower. However, a weak U. S.

Speaker 1

Report for July pushed unemployment from 4.1% to 4.3% and suggest that the U. S. Economy is finally slowing. The consumer price index in Canada dropped to 2.7% in June, down from a surprisingly strong 2.9% in May. Overall, inflation is on a positive trend, dropping from 2.9% last quarter and from 3.4% in December 2023.

Speaker 1

Once again, shelter costs rose disproportionately 6.2% and contributed much of the gain. June's muted inflation report resulted in a second consecutive quarter point rate reduction by the Bank of Canada on July 24. The Bank of Canada policy rate is now 4.5% and the consensus among bank economists is for 1 or 2 more cuts by the end of 2024 to bring the policy rate down to 4% to 4.25%. Most economists are forecasting the Bank of Canada to cut rates by a further 1% to 1.25% by the end of 2025. Inflation also appears to be dropping in the U.

Speaker 1

S. It was 3% in June versus 3.3% in May, and the weak job report in July reinforces the likelihood of an interest rate cut by the Fed in September and possibly another at year end. Turning to the real estate markets, the commercial real estate market, I'll talk about first. The pace of cap rate increases continued to slow in Q2 with the yield rising just 2 basis points versus 9 basis points last quarter to an average cap rate of 6.71%. It appears as though cap rates have now almost fully reset.

Speaker 1

The industrial market continued to slow down in Q2 with a national availability rate reaching 4.2%. In Toronto and Vancouver, the availability rates rose to 3.9%. Absorption and growth in industrial lease rates appears to have come to an end for the time being. Conversely, the office market in Canada was stable in Q2 with 2,200,000 square feet of positive net absorption and an unchanged vacancy rate of 18.5%. Vancouver remained the tightest market in Canada with a 10.8% vacancy rate downtown and a suburban vacancy rate of 8.4%.

Speaker 1

In Toronto, the downtown vacancy rate was more elevated at 18.1%, while the suburban vacancy rate was very high at 21%. Looking at the residential resale market, the resale market has remained lethargic in most parts of Canada, including our core markets in the GTA and Vancouver. In the GTA, June sales were down 16% compared to last year and new listings were up 12%. The home price index in the GTA was down 4.6% on a year over year basis, but has been steady over the last 4 months, including July. On a seasonally adjusted month over month basis, both the average selling price and the composite index were up slightly compared to last month.

Speaker 1

It was much of the same story in Metro Vancouver, where resales in June were down 19% from the previous year and the number of listings was up 42% year over year. The home price index has increased by 0.5% of 1% on a year over year basis and was up 0.4% compared to last month. Turning to the new home market. In the GTA, there were 6,040 new home sales in the first half of twenty twenty four, a decrease of 45% compared to the same period in 2023. Low rise sales declined by 17%, while high rise sales dropped by 59%, which reflects the impact of high interest rates and a significant increase in construction costs.

Speaker 1

Unsold inventory increased by 26%. Fortunately, 89% of the 90,000 units under construction in the GTA have been pre sold. There are 30,000 units in pre construction, which have also been 55% pre sold. The benchmark price index dropped by 6% for low rise and 6.2% for high rise on a year over year basis. In Vancouver, the Q2 figures are not yet available.

Speaker 1

In Q1, Vancouver's new multi residential new multifamily home sales decreased by 15% from the previous quarter, but was 27% above the same quarter last year. The lack of presales is partly due to the fact that new launches were only 50% of the previous quarter. Of the new inventory leased, a respectable 47% was presold by the end of the quarter. To summarize, the housing markets remain slow and we should start to see a gradual recovery in both the resale and new home markets as deeper interest rate cuts occur over 2024 2025. To conclude, despite weak real estate conditions, we've had a very good first half of twenty twenty four, generating earnings of $0.53 a share.

Speaker 1

This is our 2nd best results in the 12 years since we went public on the TSX in 2012. The portfolio quality has remained resilient in 2024. In fact, our combined Stage 1 and Stage 2 and stage 3 loans have actually dropped from $158,000,000 at the beginning of the year to $134,000,000 at the end of this quarter. Although there has been some migration of stage loans stage 2 loans into stage 3, we strongly believe that we are adequately provisioned. Given the prolonged weakness in the real estate markets, I believe that there were both fewer active non bank lenders in the future and that Atrium will greatly benefit from the fallout.

Speaker 1

This process may have already started as we had a strong quarter of origination in Q2 despite the lack of activity and transactions in the real estate market. For the balance of 2024, we're targeting a higher proportion of originations in the single family sector as well as certain commercial sectors. This strategy is aimed at de risking the portfolio. My sense is that the real estate markets will be soft until at least the end of 2024, despite a further 50 to 75 basis point predicted drop in interest rates. We forecast that a market recovery should start to occur in 2025 when real estate markets have bottomed and the Bank of Canada has further dropped its interest rates.

Speaker 1

In addition, the lack of development activity is also starting to result in a drop in construction costs, particularly in low rise construction, but also in the early trades for high rise development like shoring, excavation and forming. I remain confident that our team can manage our portfolio throughout the balance of this downturn. As we discussed in the past, Atrium has consistently outperformed its peers during market downturns when the benefits of our disciplined underwriting are most apparent. That's all for the presentation, but we'd be pleased to take any questions from the viewers from the listeners.

Operator

First question is from Zach Davidson from National Bank Financial. Zach, please go ahead.

Speaker 1

Competitive landscape and what you're seeing as far as you talked about the non bank lenders maybe getting a little bit quieter and the banks as well as far as what you're seeing in the marketplace? Yes, I wouldn't say I've seen the banks getting quieter at all. In fact, some of them have been aggressive. There's actually a difference in the level of aggressiveness within the Big Six, a fairly significant difference. But overall, I'd say they're still actively lending for sure, not only to the Tier 1 players, but also the Tier 2 players as well who have experience and a reputation of success in the past.

Speaker 1

But we are seeing less competition and we are seeing more opportunities versus the other non bank lenders. It's not that I've heard that the private mix are facing redemptions or anything like that, but I suspect fundraising is difficult at this point in time and that there are some redemptions occurring. So we are finding like I was really surprised, we did almost $100,000,000 of brand new business in Q2 that was much more than I would have expected. Terrific. Thank you.

Operator

Okay. If that's It appears that there's no other questions at this time. I will now give the call back to Robert Goodall for closing statements.

Speaker 1

Okay. Thank you to the listeners for attending this conference call. I hope you're pleased with the results. We're actually really pleased with how we're performing through this downturn. We've been achieving record results and this year near record results throughout this downturn and we feel very strongly that we are adequately provisioned for the problem loans that we do have And we're also nearing, touch wood, nearing the sale of 2 of them with at least 2 of them, maybe 3 of them, one with the firm deal already in place and the other one's in active negotiations with multiple buyers.

Speaker 1

So for the existing shareholders, thank you for your continued support. And for those who are prospective shareholders, I hope you're impressed with our results as well. Thank you very much.

Operator

Thank you all for participating. The conference call is now concluded. Please hang up.

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Earnings Conference Call
Atrium Mortgage Investment Q2 2024
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