Atrium Mortgage Funding Company (OTCPK:AMIVF) Q3 2023 Earnings Convention Name November 15, 2023 9:30 AM ET

Firm Members

Robert Goodall – Chief Govt Officer

John Ahmad – Chief Monetary Officer

Convention Name Members

Gaurav Mathur – Laurentian Financial institution

Rasib Bhanji – TD

Operator

Good afternoon, girls and gents and welcome to the Atrium Mortgage Funding Company Third Quarter Outcomes Convention Name. [Operator Instructions] This name is being recorded on November 15, 2023. I might now like to show the convention over to Mr. Robert Goodall, CEO. Thanks. Please go forward.

Robert Goodall

Thanks and thanks for calling in right this moment. Our CFO, John Ahmad, will begin by speaking about our monetary outcomes after which I’ll discuss our efficiency from an operational and portfolio perspective. John?

John Ahmad

Thanks, Rob. Atrium posted an earnings per share of $0.25 in Q3, which is down barely from the prior yr quarter of $0.27. This represents a stable efficiency final result given the present market circumstances going through our trade. The Q3 earnings exceeded the dividends declared for the quarter of $0.225 cents. And extra importantly, our year-to-date EPS of $0.91 is on a document tempo and nicely forward of the $0.77 posted final yr presently. Our earnings for the quarter had been pushed by a document excessive mortgage portfolio steadiness of $876 million, which is up $51 million over the quarter and a document stage of revenues pushed by a excessive portfolio charge of 11.49% at quarter finish. Offsetting a portion of this sturdy working margin generated by our portfolio was the supply for mortgage losses to acknowledge elevated credit score danger in our portfolio and we are going to contact on that in additional element shortly.

Regardless of slower actual property market circumstances, the enterprise managed to originate $115 million of mortgage principal, which is nearly double from final quarter. This was offset by $64 million of repayments, which have slowed down from a mean of round $87 million skilled within the first two quarters of the yr. The portfolio charge of 11.49% at quarter finish is a document for the corporate and is up from 11.27% over Q2 due to a 25 bps charge improve by the Financial institution of Canada on July 12, 2023. 89.3% of our portfolio is priced off floating charges and this proportion has elevated steadily from 75.4% at first of the yr. The steadiness of our portfolio that’s not floating is principally comprised of single-family mortgages with phrases of 12 months, to allow them to reprice shortly and assist drive our portfolio charge increased over the quarter. Assuming no charge adjustments from the Financial institution of Canada, we might count on our portfolio charge to come back down barely as we proceed to deal with sourcing high-quality, decrease danger mortgages presently.

Our funding profile continues to stay sturdy at quarter finish. Borrowings below the credit score facility had been $208 million at quarter finish and benefited from a pay-down of $13 million as a result of sale of our funding property in Regina, Saskatchewan for a small acquire over guide worth. This helps to create extra funding capability and purchase extra accretive property. As well as, on August 28, we efficiently prolonged our credit score facility with favorable phrases, which is a testomony to our constant enterprise efficiency over time. We prolonged the maturity date of that facility by nearly 2 years out to July 2025. We refreshed our accordion to set $60 million such that we will improve the power from $350 million to $375 million. We enhance our leverage ratios. We had no change in pricing. At quarter finish, our floating charge credit score facility represented simply 24% of our funding inventory and our convertible debentures of $157 million proceed to be locked in at favorable charges with maturity staggering over the following a number of years.

Total, this continues to be a really low leverage enterprise as whole debt is simply 43.1% of our whole steadiness sheet at quarter finish. The allowance for mortgage losses was elevated to 203 bps at quarter finish from 150 bps on the finish of Q2. Elevated rates of interest, inflationary building prices and a slowing financial development profile has had a big influence on all – on actual property markets and for all market contributors. We have now seen a few of that danger manifest in our portfolio, which we watch very intently on a mortgage by mortgage foundation.

In the course of the quarter, the supply was taken primarily in opposition to Stage 2 and Stage 3 loans. Stage 2 loans, that are loans that exhibit increased credit score danger than regular, have elevated from $77 million to $109 million at quarter finish. This was resulting from a rise in defaults but in addition embrace loans the place there isn’t any default. The borrower is making their scheduled funds, however we’ve conservatively assessed increased danger resulting from a possible deterioration in collateral worth.

By way of Stage 3 or impaired loans, we’ve now labeled 23 million loans into the Stage 3 class for the primary time this yr, as a result of final result of our evaluation of particular extra default conditions. We assess every mortgage in Stage 2 and Stage 3 individually for potential losses and the supply this quarter was pushed largely by the evaluation of those loans. Our Stage 1 reserves on performing loans stay elevated at 1.48% as nicely given weak forward-looking macroeconomic indicators.

Regardless of difficult market circumstances, we consider our enterprise can proceed to ship stable outcomes for shareholders and Q3 was no exception. We’re in a document tempo earnings sensible on a year-to-date foundation regardless of headwinds in the true property markets. Our steadiness sheet stays sturdy with loads of capability for development and liquidity ought to the necessity come up. And we proceed to function a low leverage and lean enterprise mannequin when it comes to working bills. Our focus has all the time emphasised danger administration earlier than development. However our enterprise additionally stays agile with respect to market alternatives ought to they come up.

Rob, I’ll cross it over to you for portfolio and basic enterprise updates.

Robert Goodall

Thanks. John stated we had one other very worthwhile quarter, Atrium’s fundamental earnings of $0.25 a share. We’re solely barely under final yr’s third quarter earnings of $0.27 a share, which on the time was a document for Atrium. Extra importantly, our 9-month earnings of $0.91 a share or 18% of final yr’s document outcomes and in reality, our 9-month earnings per share are near what we’d usually earn within the full yr. In Q3, we determined to extend our mortgage loss provision to $5.4 million for the quarter. As you recognize, we’ve all the time been proactive in making mortgage loss provisions. This resolution is in keeping with the actions of most monetary establishments during the last 90 days as nicely. Certainly, the most important Schedule A banks have doubled and tripled their mortgage loss provisions within the final quarter.

The mortgage portfolio elevated from $825 million to $876 million quarter-over-quarter. We had an exceptionally sturdy quarter of origination, notably from the Ontario workplace. Atrium now has nearly 77% of its portfolio situated in Ontario with the steadiness in Western Canada. Because of diminished exercise in actual property markets throughout Canada, I think that Atrium’s mortgage portfolio will drop to some extent in This fall regardless of our charges being extra aggressive than ever with institutional lenders. With the rise in rates of interest, we’ve been in a position to cut back our unfold over prime and compete extra successfully with banks, credit score unions and belief firms. This permits us to supply increased high quality loans, which is vital at this level within the financial cycle.

Atrium’s whole of excessive ratio loans, that’s loans over 75% mortgage to worth, stay very low at $36 million, which is the same as simply 4% of the entire portfolio. Atrium’s p.c of first mortgages remained excessive at 95.4% and building loans signify simply 7% of the entire mortgage portfolio. I view building loans as probably the most dangerous forms of loans right this moment, due to ramp in value overruns and time delays. In Q3, the typical mortgage to worth of the portfolio was regular at 61% and continues to stay nicely under our goal of 65%.

Turning to defaults, we’ve a number of industrial and multi-residential loans in default within the portfolio and I’ll communicate briefly about every of them. The primary is a pre-sold mission in Sutton, Ontario. The final two phases of this low rise improvement are scheduled to be registered in November. This $2.3 million mortgage is forecasted to be repaid in full earlier than the tip of the yr. The second mortgage is $19.1 million with state view properties. Atrium holds essentially the most senior rating tranche of a $24 million first mortgage with 5.5 million subordinate tranche held by one other lender behind us. The mortgage is secured by a 5.3 acre zoned townhouse web site situated in Markham. The primary purchaser did not waive circumstances and we’re working to finalize an settlement with a second bidder.

The third mortgage is in North Vancouver. It’s a $47.1 million first mortgage secured by a 4.5 acre web site that’s totally accepted for a mixture of multi-residential buildings each rental and condominium and having a gross ground space of roughly 300,000 sq. ft. The property was appraised earlier within the yr by a revered appraisal agency for $83 million, implying a mortgage to worth of 56.7%. We view the appraisal as aggressive in right this moment’s market, however the court docket gave the borrower till mid-March 2024 to repay the mortgage. We anticipate having the authorized proper to rent a realtor and promote the mission by the tip of April 2024 if a mortgage shouldn’t be paid off by the borrower earlier than that point.

The remaining 4 loans are situated in Larger Vancouver and solely not too long ago went into default, in reality, in November 1. The loans totaled $34 million and they’re related to a single sponsor. Because of ongoing authorized proceedings, I’m unable to talk in a lot element concerning the loans, however I’ll inform you what I can. The loans vary in dimension from $3.6 million to $12.7 million and are secured by low rise improvement websites, principally townhouse websites in Langley, Richmond and White Rock, all suburbs of Vancouver. One is the development mortgage and the opposite three are bridge loans. We’re nonetheless gathering data at this early stage.

Defaults within the single-family mortgage portfolio totaled $9.9 million, up simply barely from final quarter. These loans have mortgage to values starting from 56% to 87%. As such, we don’t suppose there may be a lot if any loss publicity on the one household mortgage portfolios. In an effort to handle the weak spot within the total actual property markets and the brand new defaults in BC, Atrium elevated its mortgage loss reserve in Q3 by $5.44 million. Atrium’s mortgage loss reserve is now a really wholesome $17.8 million, which is the same as 203 foundation factors on the general mortgage portfolio, up from 150 foundation factors final quarter and 138 foundation factors in Q1.

Trying forward, we see the market remaining weak for the following few quarters. And we are going to proactively improve our mortgage loss provision as wanted, which can defend future earnings. We forecast {that a} market restoration ought to step by step start by the center of 2024 when actual property markets have bottomed, inflation has declined and the Financial institution of Canada has begun to drop rates of interest.

Turning to our funding properties. Originally of Q3 we had two foreclosed properties, a 90-unit rental mission in Regina and a 4-Plex in Leduc, which is a suburb of Edmonton. The sale of the Regina condo closed in Q3 for $13.5 million are carrying value was $13.2 million and the web proceeds of sale resulted in a small revenue. The one remaining foreclosed asset is a 4-Plex in Leduc, which is carried at $1.1 million. That property is persistently 100% leased, and generates between a 4% and a 4.5% yield.

My financial commentary is as follows. GDP is dropped dramatically from the primary quarter. GDP fell 0.2% in Q2 and is forecasted dropping level 1% in Q3. The Financial institution of Canada can also be now forecasting GDP development of lower than 1% for the following three to 4 quarters. Canada’s anemic financial efficiency contrasts with america who posted 4.9% GDP development in Q3. The U.S. shopper is much less leveraged, and consequently excessive rates of interest are having much less influence. The Canadian unemployment charge elevated from 5.4% to five.7% throughout the quarter, which is in keeping with a scarcity of GDP development. The unemployment charge has elevated 4x within the final 6 months.

Inflation rose from 2.8% within the spring to 4% in August due to rising vitality costs and mortgage prices. However inflation did drop to three.8% in September, and inflationary pressures seem like abating. Excluding meals and vitality, GTA in September rose solely 3.2% on a year-over-year foundation, and core measures of inflation additionally slowed to three.4%. The Financial institution of Canada is now forecasting inflation of three.5% in 2024 and a pair of% by mid-2025. The Financial institution of Canada has left its coverage charge unchanged since July, and seems to be softening its stance on rates of interest. Regardless of complaining about political intervention, the present consensus is that the Financial institution of Canada will begin easing charges on the finish of Q2 2024.

Turning to the true property markets and first, the industrial actual property markets, cap charges proceed to step by step improve in Q3 throughout all markets and sectors. The nationwide common cap charge rose 17 foundation factors quarter-over-quarter to six.45%. Not surprisingly, the workplace sector had the biggest improve in cap charges, however extra favourite sectors, like industrial, retail and multifamily, a really small cap charge will increase. Certainly, CBRE reported the rental charge development within the multifamily sector as fully offset increased cap charges. The Canadian industrial emptiness charge rose by 40 foundation factors in Q3 to 2.5% from an all-time low. In Atrium’s core markets industrial emptiness charge in Toronto rose to 1.9% whereas Vancouver rose to three%. There’s a basic feeling that the expansion and industrial charges is at or close to an finish, and that absorption will proceed to decelerate. Canadian workplace emptiness charge remained excessive at 18.2%. Vancouver remained the tightest workplace market in Canada with an 11.8% emptiness charge downtown and seven.2% within the suburbs in Toronto, the place Atrium has very restricted workplace publicity. The downtown emptiness charge was extra elevated at 15.8%, whereas the suburban emptiness charge was 20.6%.

Trying on the residential resale market within the GTA, there have been 4,600 resales in October, which was down 5.8% in comparison with the earlier yr. On a month over month foundation, gross sales had been additionally down. New listings edged decrease on a month over month foundation, over 38% above the document low listings of a yr in the past. The house value index was up for 1.4% on a year-over-year foundation, however down 1.7% on a month-over-month foundation. In Metro Vancouver, there have been 2,000 resales in October, which was up 3.7% from a yr in the past however stay under the 10-year common for October. The variety of newly listed residential properties in Metro Vancouver elevated by 15% on a year-over-year foundation.

Turning to the brand new residence market, the gross sales of latest properties remained weak throughout a lot of the nation. Within the GTA, there have been 15,000 new properties gross sales year-to-date, representing a lower of 30% when in comparison with the identical interval in 2022. Excessive rise gross sales had been down 43%, whereas low rise gross sales truly elevated 34%. On a month-over-month foundation new residence gross sales in September 23 had been 3x stronger than final yr. Unsold stock in September was up from final yr however stays at a really affordable stage. The benchmark value for top rise and low-rise product dropped by 10.5% and a 15.5% on a year-over-year foundation, partly resulting from a change within the mixture of gross sales towards rather more reasonably priced product.

The provision of unsold excessive rise stock elevated on a quarterly foundation from 13,900 items to 16,400 items. Nevertheless, 64% of that stock is within the pre sale stage and should by no means be constructed. There are solely 515 unsold items of standing stock within the GTA, and 92% of all items at present below building have been pre bought. In Vancouver, the Q3 figures should not but obtainable. However in Q2 Metro Vancouver’s new multifamily residence gross sales represented a 66% improve in comparison with Q1 and are much like the 5-year second quarter common of gross sales. Standing stock of accomplished shifting prepared items on the finish of Q2 was 1,010 items, a rise of 4% from the earlier quarter. 87% of concrete condominium items launched on the market and scheduled to finish honor earlier than 2028 have been pre bought.

Our view is at a fabric restoration within the new residence market will solely start as soon as building prices have dropped. Inflation has declined and within the Financial institution of Canada has signaled a drop in industries. So to complete, Q3 was one other good quarter for Atrium, we generated earnings per share of $0.91 on a year-to-date foundation, which might usually be near earnings per share for a full yr. We’re on monitor for the biggest particular dividend in our historical past. As well as, we had been in a position to promote our Regina condo constructing at a value barely above our guide worth, thereby lowering our funding properties to a carrying value of solely $1.1 million. Though the variety of defaults in our portfolio elevated within the newest quarter, we’ve handled these defaults by offering for an outsize mortgage loss provision of $5.4 million. It’s value noting that we had been in a position to expense this huge provision and nonetheless generate stable quarterly earnings of $0.25 a share a determine which is nicely above the dividend for the quarter. At this time’s excessive rates of interest have truly elevated our curiosity margin, versus most monetary establishments who’re going through diminished rate of interest margins.

My sense is that actual property markets can be smooth for one more three to 4 quarters, and that GDP development can be negligible. The excellent news is inflation will nearly actually fall throughout this era, and building begins will plummet, which ought to result in a fabric drop in building prices. In reality, building prices have already began to drop as a result of trades not have a backlog of labor. Essentially the most pronounced drop has been in low rise building. However early trades for mid rise and excessive rise building have additionally begun trying to find new contracts.

I stay assured that our workforce can handle our portfolio by the cycle, we’ve been actively managing our present portfolio to establish weaknesses early and take care of them expeditiously. We have now bought subordinate tranches of some increased danger loans during the last 6 months in an effort to de-risk the portfolio. We’ve additionally elevated our proportion of first mortgages and saved the portfolio mortgage to worth ratios nicely under our long-term goal of 65%. That’s it for our feedback. Thanks. And we’d be happy to take any questions from the listeners.

Query-and-Reply Session

Operator

Thanks. [Operator Instructions] Your first query comes from the road of Gaurav Mathur from Laurentian Financial institution. Please go forward.

Gaurav Mathur

Thanks and good afternoon, everybody. Simply wanting on the Stage 2 mortgage will increase this quarter, one can’t inform however discover that it’s coming from the excessive rise, mid rise and the housing and a blocking phase. As you’re looking on the subsequent 12 to 18 months induced, maybe see one phase fare worse than the others?

Robert Goodall

Properly, these, I feel these segments you talked about signify 90% of our portfolio. So it’s not shocking that they’d be coming from these segments. However our view is resales are most likely going to be the steadiest as a result of they’re smaller and mortgage quantity, rather more buying and selling. I used to be stunned to see the low rise gross sales in new properties truly go up. It was most likely from a low base the yr earlier than as a result of the final feeling is that reasonably priced product is promoting okay. However dearer product is the place gross sales are actually gradual proper now. And also you form of consider low rise not a lot townhouses. Townhouses are form of essentially the most reasonably priced a part of the low rise sector. However indifferent and semi indifferent you’ll suppose can be fairly gradual proper now. Equally, for condominiums, mid rise and excessive rise, the costly the condominiums are those which might be promoting slowest. And in the event you have a look at the launches which have been profitable this yr, they’re nearly all reasonably priced. In reality, I noticed one thing this morning from a consumer that stated the typical was one thing like $1,175 a foot was the typical of essentially the most profitable launches this yr. And that might be nicely under the typical value of a launch within the GTA.

Gaurav Mathur

Okay. Nice. After which simply switching gears right here on to your ready remarks on building financing, do you foresee some form of a pullback so far as building lending is anxious, given the volatility within the industrial actual property sector?

Robert Goodall

It could be getting higher now, if you’re within the midst of a building mortgage, it’s robust. However as I’ve talked about in my remarks, there may be proof that trades are the rather more affordable and they’re pricing. They don’t have the large backlog of labor that they as soon as had, the place they had been simply pricing out no matter they wished. And builders wanted to go ahead with their mission. So, they’ve to just accept these costs. Now, due to a lot fewer launches, and due to failed launches, notably smaller gamers. I feel trades for good high quality builders who they know will succeed and get by their pre-sales, I feel they’re getting actually good quotes, proper, or they’re beginning to get actually good quotes proper now, notably in low-rise, however it’ll occur in high-rise as nicely. Excessive-rises simply takes longer to construct, so in my remarks, I’ve stated that you’re seeing value drops within the early trades like forming, as a result of they’re those which might be ending up proper now and don’t have the massive backlog. However the ending trades in high-rise and mid-rise, simply most likely nonetheless have 2 years or 3 years of excellent instances forward of them. So, a variety of builders aren’t fixing these prices, proper now. They’ll fear about these prices in a while, as a result of they know they’re coming down.

Gaurav Mathur

Okay. Nice. Properly, thanks for the colour. I’ll flip it again to the operator.

Operator

[Operator Instructions] And your subsequent query comes from the road of Rasib Bhanji from TD. Please go forward.

Rasib Bhanji

Good afternoon. Thanks for the query. Rob, if I might begin with the default state view. I feel your commentary final quarter was that it ought to have – it needs to be paid-off by the tip of the yr. However I perceive you might be working with a brand new purchaser right here. Is that very same timeline affordable or ought to we count on it to be a bit extra drawn out?

Robert Goodall

Sure. No, they wasted, sadly, 60 days of our time. So, we’re near signing a take care of a second bidder. There are fairly a number of bidders, truly. However we’ve recognized one and we’re going backwards and forwards ending an settlement of buy and sale with a second bidder. And that one would shut earlier than the tip of Q1, however not in This fall. However by the point we current to you, in the event that they go ahead, I feel we’d know whether or not they’re agency or not.

Rasib Bhanji

Okay. Understood. After which had a number of, I assume reconciliation questions on the default. So, $22.7 million of Stage 3 loans, are these a part of the 4 loans in Larger Vancouver that only recently went into default?

Robert Goodall

So, a part of it’s and a part of it are different loans.

Rasib Bhanji

Okay.

Robert Goodall

It’s a mixture of Stage 2 and three, I might say extra of them are in Stage 2 proper now, majority.

Rasib Bhanji

Okay. Understood. And on the TCOs [ph], recognize you took a big provision this quarter, was it going over your allowances schedule, I don’t suppose you’ve got truly taken off any write-offs this yr. One, simply wished to substantiate that, if that’s right. And second, do you count on to take losses whether or not or write-offs, whether or not it will be principal or accrued curiosity on any of those loans?

Robert Goodall

So, we haven’t taken a variety of write-up in an extended, lengthy, very long time, a few years. We have now been constructing this up. I imply the definition of Stage 3, and I’ll let John right me if I’m unsuitable, is there concern about impairment. So sure, we expect that there can be some impairment, not overly important. And in the event you have a look at our $17.8 million, total provision, 148 foundation factors, is definitely allotted to Stage 1. Simply to offer you a way of how we view the market has modified, I feel at first of COVID, our complete mortgage loss provision added as much as one thing prefer it was up 74 foundation factors or one thing? So, we’ve double the supply, simply on the Stage 1, which is the bottom danger portion of the portfolio. We have now doubled the supply in Stage 1 that we had in the complete portfolio at first of COVID. That exhibits you that we are attempting to be conservative, and that we absorb a lot larger provisions to mirror the weaker market.

John Ahmad

Alright. I’ll simply affirm for you, as nicely Rasib that, we’ve not written off something year-to-date. Like, as Rob talked about, the place we constructed up our provisions for particular loans in particular conditions, however as soon as we attain some extent within the course of the place we settle, that’s the place we’d proceed with the write-off, however presumably since we’re offering that wouldn’t be a lot of a monetary influence, assuming our reserves are applicable.

Rasib Bhanji

Okay. Understood. And I had two fast questions right here, the upcoming debenture in June of subsequent yr, what are your plans for that, are you planning on refinancing it or possibly leaning in your credit score facility to charges come down?

Robert Goodall

So, proper now we’ve $100 million obtainable in our line of credit score. So, we’d like it if the convertible market opened up, convertible debenture market opened up, however the one events who’ve accomplished it have paid a really excessive coupon that we’re merely not keen to pay. So, our desire can be if we might get a charge that we may very well be snug with to do it within the capital markets, however assuming it isn’t, and that’s form of what we budgeted for by leaving a number of liquidity, then we are going to simply pay it off within the line of credit score.

Rasib Bhanji

Understood. That’s it for me. Thanks.

Operator

[Operator Instructions] Mr. Goodall, there are not any additional questions presently. Please proceed.

Robert Goodall

Okay. Thanks very a lot for attending our convention name and for these of you who’re shareholders, recognize your persevering with dedication to the corporate. Have an excellent day.

Operator

Thanks. Girls and gents, that does conclude our convention for right this moment. Thanks all for collaborating and all of us disconnect.