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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Atrium Mortgage Investment Corporation's Second Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, July 29, 2021.Certain statements will be made during this phone call to make -- 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, statements, and opinions of Atrium's management on the date of the statements are made. Atrium undertakes no obligation to update these forward-looking statements in the event that management beliefs, estimates or opinions or other factors change.I would now like to turn the conference over to your host, Mr. Goodall, President. Please go ahead.
Thank you very much and thank you for calling in today. Our CFO, Jennifer Scoffield, will start by talking about our financial results and then I'll speak about our performance from an operational and portfolio perspective. Jennifer?
Atrium just completed another strong quarter. Our revenues for the second quarter were $16.2 million, consistent with Q2 2020. Mortgage interest and fees were $16 million for the quarter, also consistent with the second quarter of 2020. We had net rental income of $192,000 for the quarter compared to net rental income of $143,000 in the comparable quarter.Net income for the 3 months ended June 30, 2021, was $10.6 million, an increase of 8.2% from the second quarter of 2020. Basic and diluted earnings per common share were $0.25 for the 3 months ended June 30, 2021, compared to $0.23 basic and diluted earnings per common share for the second quarter of the prior year. Dividends declared for the second quarter of 2021 totaled $0.225. Our earnings per share year-to-date were $0.48, which exceeds our dividends declared year-to-date of $0.45. Operating expenses, excluding the provision for mortgage losses for Q2 2021 remained consistent with Q2 2020 at approximately 1.2% of assets on an annualized basis.Our allowance from mortgage losses at June 30, 2021, was $10 million or 1.41% of the mortgage portfolio. The lower mortgage portfolio balance at June 30, combined with changes in assumptions in the expected credit loss model, resulted in a provision for mortgage losses of 0 in the current quarter. Our provision for mortgage losses year-to-date is $869,000. Our interest expense for the second quarter was $3.4 million, consistent with Q2 2020. The annualized weighted average interest rate on our credit facility was 2.8% in the current quarter, also consistent with the rate for the comparable quarter. On June 30, we repaid early our 5.5% convertible debentures that were due to mature on September 30, 2021. A total of $39.8 million of outstanding debentures were repaid using our credit facility.Our mortgages receivable balance at June 30, 2021, was $703 million, a decrease of 4.7% from year-end. During the quarter, we funded mortgages totaling $93 million and had repayments of $148 million. At June 30, the portfolio had a weighted average loan-to-value of 61.2%. The weighted average interest rate of the portfolio at June 30 was 8.56% compared to 8.58% at March 31 and 8.65% at year-end. We closed the quarter with a conservative debt to total assets ratio of 35% and total assets of $719 million. Our mortgage interest collection rate during the quarter continued to be in line with historical collection rates.Our portfolio has been resilient throughout the pandemic. We believe our conservative lending approach and our focus on high-quality properties and borrowers will enable our portfolio to remain so during these challenging times.I will now pass you over to Robert Goodall, our CEO.
Thank you. As Jennifer mentioned, the operating results for Q2 were very strong and well above last year's quarterly results. I also think we're poised for a strong half of 2021. The Q2 results were achieved, notwithstanding a record $148 million of repayments, which caused our mortgage portfolio to decrease from $765 million last quarter to $710 million this quarter. Fortunately, we also had an above-average level of loan originations.It's worth noting that in the first 6 months of 2021, we have had close to a 60% annualized loan turnover rate versus a norm of 40% to 50% in the past. Although repayments in Q3 are expected to be higher than normal, the pipeline of new deals is sizable, and we estimate that the mortgage portfolio at the end of Q3 will be equal to or larger than Q2's balance of $710 million. I also suspect that starting in Q4, we will go through a period of low loan repayments. So you will likely see Atrium's loan portfolio grow materially in size in the fourth quarter. This assumption makes logical sense as, on average, our new loans are for terms of at least 2 years.Over the last 9 months, we've expanded our debt team to seven loan originators and four analysts and it's starting to really pay off from a loan origination perspective. Our pipeline of potential new loan opportunities at Atrium has never been so consistently high from week to week. The loan quality of the portfolio in Q2 was stable from previous quarters.We have now repositioned the portfolio to the point where over 99% of our mortgages are located in our two preferred markets, Ontario and BC. These are the two markets where we have active offices and where we have experienced virtually no loan losses over our 20-year history. As a result, the loan loss provision was not increased in Q2 and remains at a healthy 141 basis points. This provision provides insurance against a longer than expected recovery period from the pandemic. The average loan-to-value of the portfolio held steady in Q2 at 61.2% and continues to remain below our target of 65%.Turning to operations. Our average mortgage rate in Q2 was 8.56%, down very slightly from 8.58% at March 31. New loan activity was strong with $93 million of mortgage advances. 91% of those new loans were residential, with the highest proportion being loans in high-rise projects. The single-family division, again, had a fairly strong quarter and now represents almost 6% of our total portfolio.Geographically, approximately 78% of the funded loans were from Ontario and 22% from BC. However, most of the loan repayments in the quarter were based in Ontario. So Ontario's proportion of the portfolio actually fell in Q2. The geographic composition of the portfolio is now 72% in Ontario, down from 75% last quarter and 27% in BC, up from 24% last quarter. Alberta represented less than 1% of the total portfolio. Based on a strong pipeline of BC loans, we expect that BC will grow it's proportion of the portfolio in Q3.Commercial loans continue to represent about 21% of the portfolio, but the breakdown of loans within the multi-residential sector changed during Q2. In particular, the low-rise segment dropped to 14% of the loan portfolio due to three large repayments in the GTA totaling about $70 million. As a result, the multi-residential sector is now distributed as follows: low-rise 14%, mid-rise 30%, and high-rise 28%.Atrium's percentage of first mortgages increased to 84% from 82.7% last quarter, and the first -- and the percentage of first mortgages is now in excess of 80% in each of the three provinces where we operate. And probably most importantly, 92% of the portfolio are low ratio loans, less than 75% loan-to-value, reflecting the conservative nature of our portfolio. Of the three loans, which are above 75% loan-to-value, the largest loan has since been repaid in early Q3, and we expect the second-largest loan also to be repaid before the end of Q3. As a result, we will likely have only one loan with a loan-to-value greater than 75%, and it will represent less than 1% of the total portfolio.Turning to defaults. The following commercial borrowers had loans in default in Q2: the first is a $5.4 million first mortgage on an estate subdivision in Southwest Calgary. This first mortgage is one of only two loans, which remain in Alberta and has been in arrears for more than a year. Phase II and III of the property were sold last quarter, thereby reducing the outstanding loan balance from $10 million to $5.4 million. The remaining security is Phase IV, composed of 31 unserviced lots and the most prestigious of the four phases in the development. Phase IV was listed for sale until the spring but did not generate sufficient offers. We intend to hold the property off the market until the fall when the effects of the pandemic will have waned and developers will have returned from summer holidays.Fortunately, the Calgary housing market has been one of the strongest markets across Canada in 2021, led by detached home prices, which are up 13% on a year-over-year basis. Please note, this is the only loan in the portfolio where we expect to incur a loss, and we have a specific loan loss provision in place to deal with that loss.The second borrower in default has a $5.4 million second mortgage secured by a portfolio of condominium units in Toronto. And although technically in default, the risk profile of this loan is actually very low. The reason for the default is the amount of debt subordinate to Atrium. Atrium has a $5.4 million senior tranche of a $7.1 million second mortgage behind the first mortgage, which has been reduced to $3.6 million for the balance of $15.9 million only last quarter. The loan is secured by a portfolio of 30 condominium units in Toronto and virtually all of those condominium units are less than 5 years old. Atrium's loan-to-value has been reduced from 60% in Q1, all the way down to 49.7% after the most recent sale. Please note that financial institutions would regularly make loans of 65% to 70% of value against completed condominiums. So it's a very, very safe loan, notwithstanding it's in default.And the final borrower that's in default has four first mortgages totaling $45 million in Vancouver. The borrower is best described as asset-rich and cash-poor. Three of the loans totaling $37 million are secured by well development sites near a major SkyTrain station. These three loans are cross-collateralized. All three loans have a loan to appraise value of less than 75% and are considered very marketable properties. The fourth loan totaling $8.1 million is a first mortgage secured by an apartment building and has a loan-to-value ratio of 74%.In Q2, we successfully negotiated a forbearance agreement, whereby the borrower must list the properties for sale with real estate agents approved by Atrium and has until early December to sell their properties, after which time, Atrium will assume control of the sales process. A credible developer has submitted an LOI on the three development sites, although no agreement has yet been finalized. The sales price would fully extinguish Atrium's debt on the three properties. So we continue to feel comfortable that the quality of our collateral will insulate Atrium for amending possible loss.Defaults in the single-family portfolio totaled only $1.1 million in Q2 versus $2.1 million last quarter. So overall, we feel very comfortable with the quality of the portfolio. Please note that we analyze and risk rate each loan every quarter to make sure that we keep on top of any new issues.Turning to foreclosures. We continue to have two foreclosed properties, both of them apartment buildings, totaling $16.13 million. The first is the fourplex in Leduc and the second is a 90 unit rental project in Regina. The Leduc cost base is $1.1 million, and the cost base in Regina is $15.03 million. The fourplex in Leduc is 100% leased and was 100% leased throughout Q2. The Regina apartment range from 88% to 90% leased during Q2. These properties generate significant distributions to Atrium every quarter.Our economic outlook is as follows: the lockdowns in Q2 resulted in slow economic growth and a higher unemployment rate, but there's virtually unanimous optimism from economists about the rest of 2021 and beyond. We're encouraged by the increased vaccination rates and lower level of new COVID-19 cases across Canada, but we will remain very diligent in underwriting new loans given the continuing economic threat of emerging variants. While the housing market and industrial sectors have remained strong throughout the pandemic, we are cautiously optimistic that the retail and office sectors will also begin to recover as the general economy strengthens.Trying to forecast inflation and its effect on interest rates has been difficult. On the one hand, supply-chain problems, a shortage of labor in certain industries, and the Bank of Canada continuing to reduce its bond purchases, all point to higher inflation. On the other hand, many commodities, including oil, copper, and especially lumber, appear to have peaked and have had significant price drops recently.The bond market does not seem to be overly concerned about long-term inflation. In fact, over the last quarter, the yield curve flattened with the 2-year bond yield actually increasing by 24 basis points, while the 10-year bond yield dropped by 32 basis points. This suggests a market view that rates will stay low for a long period of time. And this information tells us where possible that we should attempt to structure either fixed-rate loans or floating rate loans with the floor, and that's what we've been doing.Turning to the real estate markets. The housing market slowed down in Q2 across virtually every major market in Canada, but the markets remain very, very strong. The national sales to listing ratio was 69% versus the long-term average of 54%. And despite a retreat, sales had an all-time record for the month of June. We expect that sales volumes may drop somewhat in the future, now that our provincial economies are opening up and consumer spending naturally shifts from goods to services. But there is plenty of room for lower sales without causing any concern about the strength of the market.Looking at the resales market. First, in Toronto, June resales were 28.5% higher on a year-over-year basis, but activity seems to have plateaued since the March peak in sales. Year-over-year sales was strongest in the Condominium segment, both in the city of Toronto and in the suburbs. In terms of pricing, both actual and seasonally adjusted average prices head slightly lower in June on a month-to-month basis as compared to May, possibly attributable to the more onerous stress test qualifying rate introduced on June 1.However, the market is still tight due to a lack of supply. Active -- total active listings are down 19% since this time last year, which suggests a continuation of very competitive market conditions for buyers. The average resale price of a detached house in the GTA has increased 25% in the last year, while semi-detached homes and townhouses have increased by 13% and 18%, respectively. The condo market is continuing its recent strength with resale prices up 8.3% year-over-year.In the Vancouver area, the situation is very similar. Resales are up 54% year-over-year, but like many other cities in Canada, the June volume was less than the previous month. Sales of detached homes were up 45%, townhouses up 54%, and condos up 60%. Total listings were down 5% year-over-year, reflecting a strong buyer's market. Prices were up 22% for detached homes, 17% for townhouses, and 9% for condominiums.Turning to the new home market in Toronto and Vancouver, they are also very healthy. In Toronto, there were over 20,000 new home sales through the end of May 2021, representing an increase of 59% compared to the same period last year. High-rise sales were up 66%, while low-rise sales saw an increase of 50%. Market conditions are relatively tight, with high-rise inventory increasing by only 10%, while low-rise inventory actually decreased by a staggering 60%. The benchmark price of $1.4 million for new low-rise product is up 24% year-over-year. The benchmark price for new high-rise product increased by 8% year-over-year to $1 million. The differential between the low-rise and high-rise product, which began to widen in the second quarter of 2020, appear to stabilize in the latest quarter.In Vancouver, new multi-family home sales in Q1 were up 75% compared to the previous quarter. This is the highest number of quarterly sales since the second quarter of 2016. The north of Fraser submarkets were up 68% from the previous quarter, and the south of Fraser submarkets were up 89%. Total inventory for the end of Q1 2021 was down 25% from the end of 2020. Standing inventory of completed units represents just 6% of overall inventory and is also down 32% on a year-over-year basis. So to summarize, the new home markets in both cities are very strong, and this trend should continue into the second half of 2021. As the economic effects of the pandemic wane, immigration levels gradually begin deriver. And the immigration levels gradually revert back to historic levels.In the commercial markets, the pandemic continues to have a negative effect on some sectors. In the retail sector, the third wave of the pandemic was very difficult for retail tenants, many of whom have relied on government support to survive. With the end of the lockdown in Ontario, we expect significant improvement over the next 12 months.In the office sector, the vacancy rate has risen at a faster rate than most industry experts anticipated, particularly in Toronto. The vacancy rate in Downtown Toronto rose again in Q2, albeit by only 90 basis points to 10%. The troubled suburban markets weaken further and now have a 17.2% vacancy rate. The only good news is that the percentage of sublet space on the market is declining as some companies are pulling back their sublet space from the market in anticipation of a return to the office in the fall. Vancouver has fared much better than most other cities with vacancies increasing from 4.6% to 60 -- to only 6.9%. And Vancouver's suburban office market was also resilient with only a 7.3% vacancy rate.Turning to apartments. CMNC (sic) [ CMCC ] reported a vacancy rate of 3.1% in Toronto and 2.6% in Vancouver in the fall of 2020. Recent news suggests that rents are firming up, and we expect that vacancy rates will gradually improve in the second half of 2021 as downtown districts reopen, immigration returns, and students begin attending classes in person.The industrial sector continues to be the most resilient sector during the pandemic. Vancouver's industrial vacancy rate dropped from 1.7% to an all-time low of 1.1%, with lease rates and selling prices remaining strong. Similarly, Toronto's industrial vacancy rate reduced from 1.6% to 1.2%. Leased rates in the GPA (sic) [ GTA ] have doubled over the last 5 years.So to summarize, Atrium had a good quarter in Q2 as it has throughout the pandemic. There was no additional loan loss provision necessary in Q2 as we have built up our loan loss reserve to a level which protects the balance sheet even if the pandemic continues for longer than expected. The portfolio continues to perform well, which reflects our industry-leading risk metrics in key categories. For example, Atrium's loan-to-value has remained steady at 61% loan-to-value throughout the pandemic. And we have the highest percentage of low-ratio loans described as loans below 75% loan-to-value amongst our peers. Moreover, we expect that figure will reduce even further in Q3.From a sector perspective, we're also well positioned with 80% of our loans focused on the strong residential housing markets. And lastly, geographically, we've repositioned the portfolio where today, over 99% of our loans are now located in Ontario and BC, two markets we understand well and have long histories of strong performance.That's it for the presentation, we'd be pleased to take any questions from the listeners.
[Operator Instructions] And your first question is from the line of Graham Ryding with TD Securities.
Just wondering with the ACLs that you've built up on your balance sheet. Any potential here for you to actually release any of the credit losses that you've accumulated or are you more likely just to keep enough insurance on the balance sheet and grow the portfolio and maybe sort of reduce the relative ACL that way?
I think, generally, the Board and the management team are pretty conservative. So I think we really have to be convinced for us to release it. I think we're more comfortable having built it up the way we have to just leave it there. But I mean, the future will tell the story. But I think we're pretty happy where it is right now and if we did release some, I don't see us releasing a lot.
Okay. And then you talked about the Calgary subdivision, maybe taking a loss on that. Is it -- is there anything you can estimate or is it just that subject to sort of selling that remaining piece of the development and that will be -- some thoughts on that?
Yes. Yes, we got it in our stage three loans, so Jennifer can tell us what the number is.
Yes. Right now, we've got a specific provision on that loan is $2.47 million on a $5.4 million balance. And that's based on a number of which estimates that we -- as far as length of time it will take to sell, what we think we'll get for it, accrued interest, et cetera. So we do feel that, that is at this point, based on our best knowledge, what we anticipate we may lose on that, yes. But ultimately, it will depend on what the selling price is, yes, it will affect the ultimate loan.
Yes. I mean, the nice thing is that as I mentioned, the detached market is up. Detached home market in Calgary is up 13% year-over-year, but it's actually up 13% since the beginning of the year because it was only at the beginning of the year that the Calgary market after years of going down, actually started to strengthen. So the nice thing is the market's coming to us. It's actually a beautiful site, what's made it difficult to sell is it's got an average selling price if you build out the homes of $1.2 million, which by Toronto and Vancouver perspective, doesn't sound expensive, but that's relatively expensive in the Calgary market. And so as the market strengthens, the bid should come for this property. So given that we've written it down, given it's the only loan in the entire portfolio where we can see any prospect of a loss, we're not in a mad rush to sell it because the market finally is moving in our direction instead of against us.
Okay. Understood. And then just in terms of your -- the portfolio, did I hear you correctly, you think it's going to be largely flat quarter-over-quarter and then start to grow in Q4?
Yes, that's what we think is going to happen because we've had an extraordinary amount of repayments and loan turnover in Q1 and especially Q2. I think Q3 is going to be fairly high as well but the good news is we've got a heck of a pipeline in Q3 as well. So it's really hard for me to know exactly where we'll end up. My best guess is we'll be about where we were at the end of Q2, maybe slightly above. But the law of averages will -- really suggest that Q4 or Q1 of next year, we'll start to have a lull in the repayments. And we have a loan production team that we've never had before in our history, so I think you'll see Q4, Q1 of next year, you'll start to see the portfolio really grow. It's a guess but that's what -- it's a guess, but it's a pretty educated guess at it.
Your next question comes from the line of Siddharth Rajeev with Fundamental Research.
Rob and Jennifer, thank you so much. I've to say that, Rob, your detailed market information is very helpful for listeners, I'm sure. Just to stretch or extend on the previous question, Q4 year-end portfolio size, if I say, about $75 million, would that be a good guess or?
It'd be a guess. I think it will definitely be over $710 million. It could be $775 million, it could be $750 million, it's really hard to know. It's really hard to know. Sorry, I have nothing that we need to resist for. We have difficulty 2 and 3 months out, 6 months out is really tough so -- but if I was guessing, if I was a betting man, I'd say it's going to be higher than where it is today.
Okay. In terms of repayments in Q3, which property type are you expecting more repayments to come from?
In Q3?
Yes.
So the two loans that are over 75% loan-to-value, which represent 85% to 90% of our high ratio loans. In fact, the only loan -- there's only three loans that we have over 75% loan-to-value, two of them are large loans with big developers. Those are the two that are paying off. One is already paid off. That's a mid-rise development that was basically 100% sold and closed in the GTA. And the second one is a mixed-use project downtown east and it should -- it's 99% built, some of the commercial space and condominium units because it's multiphase, have already closed. So it's very close as well for us to being repaid. So we think by the end of Q3, those two large loans, which will represent over $50 million of perhaps let's say, it's $100 million, $110 million of repayments, which is a bit of a guess, obviously, at this point in Q3, but half of them -- more than half will be those two loans.
Okay. And shares have done well across the board, Atrium has done well too, pre-pandemic levels now. Timing seems to be good for equity financing. Is that something that you're looking at for this year?
Yes, we'll do it if we have the need to do it. The line of credit is being extensively used and we feel we need to issue additional equity. As Jennifer mentioned, our leverage is pretty low right now because we paid off a convertible debenture. We paid off two convertible debentures in the last year, I think?
Yes, one in May 2020 and one this year again.
Yes. So -- and look, honestly, we find the convertible debentures -- they're certainly more expensive than our line of credit, much more. And with, given where we're trading now, we'd probably gear more towards equity than we would to convertible debentures. It's interesting even when bond yields drop significantly, the convertible debenture yields don't seem to drop much. So it tends to make them less appealing in an inexpensive market.
Okay. Just one more question. Although markets have kind of slowed down a bit, it still seems to be that the market is highly competitive for lenders, with lot of lenders sitting on cash. How does that impact your overall strategy in terms of which property type will be your main focus? Will you continue to focus more on BC or how do you plan to face this intense competition?
Well, the biggest way that we face the intense competition was by growing the team. And fortunately, we did that 6 to 9 months ago. And we -- I can honestly say, we've never had a team like this before. It's a really strong production team backed up by terrific analysts and managers and AVPs. So yes, I think that we'll see a disproportionate amount in BC, but BC has been soft the last 2 years. So now, as you could tell from my market summary, BC market is very strong, there's been some good opportunities there. Already in Q3, we booked some BC loans. So that's why I can say with relative confidence that the BC percentage will go up. The market, I would say, is a little bit more competitive, particularly for larger loans in Toronto but we have a pretty big presence and we're pretty well-known in this market. So we'll just battle it out. We're not seeing too much in the way of drops in rates or anything like that. If our average mortgage rate drops, which it might slightly in Q3, it might be because some of the high-ratio loans come off, not because the whole structure of the market is changing or the market is becoming more competitive. So we're being able to battle it out and get our fair share of deals without having to -- we're not going to chase risk, that's for sure; we're not going to chase yield. But we're finding we can get a pretty good volume of business, but we're well above volume-wise this year, what we were last year, and I would bet what we were 2 years ago as well before the pandemic. Any other questions?
No, sir, not at this time.
Okay. Thank you for attending our conference call, and for those of you, our shareholders, we thank you for your continuing interest in our company. Have a good afternoon.
This concludes today's conference call. You may now disconnect.