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Welcome to the Atrium Mortgage Investment Corporation's Third Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, October 29, 2021.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 defer materially. Forward-looking statements are based on the beliefs, estimates and opinions of Atrium's management and the statements that are made. Atrium undertakes no obligation to update these forward-looking statements in the event that management's beliefs, statements 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, and thanks for calling in today. Our CFO, Jennifer Scoffield, will start by talking about our financial results, and then I will speak about our performance from an operational and portfolio perspective. Jennifer?
Thanks, Rob. Atrium had a very good third quarter with revenues of CAD15.9 million and net income of CAD10.6 million or CAD0.25 per share. Mortgage interest and fees were CAD15.7 million for the quarter, up 3.6% from the third quarter of 2020. We had net rental income of CAD201,000 for the quarter compared to net rental income of CAD127,000 in the comparable quarter. Net income of CAD10.6 million for the 3 months ended September 30, 2021, was 11.4% higher than net income in the third quarter 2020.The basic and diluted earnings per common share of CAD0.25 for the current quarter are up from CAD0.22 basic and diluted earnings per common share for the third quarter of the prior year. Dividends declared during Q3 2021 totaled CAD0.225. Our earnings per share year-to-date were CAD0.73, which exceeds our dividends declared year-to-date of CAD0.675. Operating expenses, excluding the provision for mortgage losses for the third quarter remain consistent with prior quarters at approximate 1.1% of assets on an annualized basis. Our allowance for mortgage losses at September 30, 2021, was CAD10.4 million or 1.36% of our mortgage portfolio. Our provision for mortgage losses for the quarter was CAD400,000 and our year-to-date provision is CAD1.27 million.Our interest expense for the third quarter was CAD2.8 million, down from CAD3.4 million last quarter and CAD2.9 million in Q3 of 2020. Interest on our convertible debentures was lower this quarter due to the repayment on June 30 our 5.5% convertible debentures for a total of CAD39.8 million. Borrowing under our credit facility totaled CAD211 million at September 30, 2021. This is compared to CAD116 million a year ago. The annualized netted average interest rate on our credit facility was 2.87% in the third quarter, up from 2.6% in the comparable quarter last year.Our mortgage portfolio grew to CAD756 million at September 30, the largest portfolio balance in Atrium's history. Our mortgages receivable balance at September 30 was CAD758 million, an increase of 2.6% from year-end. During the quarter, we funded mortgages totaling CAD119 million and had repayments of CAD67 million. Over 60% of the loans funded in the quarter were advanced in September, so only 1 month of interest income on these loans is included in our Q3 earnings.At September 30, 2021, the portfolio had a weighted average loan-to-value of 60.9%, the weighted average interest rate on the portfolio at quarter-end was 8.42%. This compared to 8.56% at June 30 and 8.65% at year-end. This drop was primarily due to the repayment during Q3 of a CAD27 million high-ratio loan that had an interest rate of 10.5%, and we also funded a larger than usual proportion of first mortgages this quarter. We closed the quarter with a conservative debt-to-total assets ratio of 39% and total assets of CAD774 million. Our portfolio remains resilient as it has throughout the pandemic due to our conservative lending approach and our focus on high-quality properties and borrowers.I'll now pass you over to Rob Goodall, our CEO.
Thank you. As Jennifer mentioned, Atrium had a strong quarter, generating earnings of CAD0.25 per share. This result was better than I expected due to a strong quarter of loan origination, but also due to lower-than-expected repayments. Some of those anticipated repayments were deferred until Q4. Mortgage advances were almost CAD119 million versus CAD93 million in Q2. Any quarter where we surpassed the CAD100 million of mortgage advances is a very good quarter for us. Loan originations for the first 9 months have been more than double the pace of 2020 and is a reflection of the expansion of our debt team to 7 loan originators and 4 analysts, managers and AVPs. Overall, the mortgage portfolio in Q3 increased by CAD55 million from CAD711 million to CAD756 million.We do expect higher-than-normal repayments in Q4, and we estimate that we will experience close to a 60% portfolio loan turnover rate for the year as a whole. Atrium's normal portfolio turnover rate is 40% to 45%. Most of the turnover has been in the very competitive GTA market. Fortunately, our pipeline of potential new loan opportunities of Atrium has never been so consistently high from week to week. So the repayment should be mostly offset with new loan business. I continue to believe that Atrium's loan portfolio will grow materially in size in 2022 as our loan turnover should be lower next year. The reason is that most of our new loans funded in 2021 have terms of approximately 2 years.The loan quality of the portfolio in Q3 remained high, 99% of our mortgages are located in our 2 preferred markets, Ontario and BC. These are the 2 markets where we have active offices and where we have experienced virtually no loan losses over our 20-year history. Loan loss provisions remain at a very healthy 136 basis points, which provides insurance against the slowdown in the market or a longer than expected recovery period from the pandemic. The average loan-to-value in the portfolio reduced slightly in Q3 61.0% and continues to be below our target of 65%.Turning to our operations. New loan activity was strong at CAD108 million of fundings versus CAD82 million last quarter. Geographically, approximately 63% of the funded loans were from Ontario and 37% from BC. However, 100% of the loan repayments in the quarter were based in Ontario. So Ontario's proportion of the portfolio fell in Q3. The geographic composition at quarter-end is now 67% in Ontario, down from 72% last quarter. And in BC, it's 32%, up from 27% last quarter. BC had no loan repayments in Q3. Alberta continues to represent less than 1% of the total portfolio.By sector, 84% of the new loans funded in Q3 were residential or multi-residential loans, the balance being commercial loans. The single-family mortgage division had a strong quarter with CAD15 million of funded loans. While single-family mortgages have a lower than average mortgage rate, it also has a low risk profile. The single-family portfolio is entirely located in the GTA, Ottawa and Hamilton and all of the mortgages are under 75% loan to appraised value. In Q3, our average mortgage rate was 8.42%, down from 8.56% last quarter. The reasons were less about competition or a drop in interest rates and more about a change in portfolio composition.For example, we were repaid on a CAD27 million high-ratio mortgage, which had a 10.5% coupon. We funded CAD15 million of single-family mortgages at an average rate of 6.99%. And and we had a higher than normal proportion of first mortgages funded in Q3. In fact, Atrium's percentage of first mortgages increased from 84% at the end of Q2 to almost 88% this quarter. This is the highest percentage I can remember in many years and possibly in our entire history. Each of the 3 provinces where we operate have more than 85% of its loan portfolio in first mortgages.Perhaps the risk metric, which thus exemplifies our defensive lending velocity is 96% of the portfolio is less than or equal to 75% loan-to-value, up from 92% last quarter, and again, at the highest level that I can ever remember. Of the two loans, which are above 75% loan to valuate, the largest loan will almost certainly be repaid in Q4. So by year-end, we will likely only have one loan with a loan-to-value of greater than 75%, and it will represent less than 1% of the total portfolio.Looking at defaults. The following commercial borrowers had loans in default in Q3, a CAD5.5 million first mortgage on an estate subdivision in Southwest Calgary. This first mortgage is one of only 2 loans remaining in Alberta and have been in arrears for a couple of years. Phase 2 and 3 of the property were sold in Q1 2021, thereby reducing the outstanding loan balance to its current level. The remaining security is Phase 4, composed of 31 unserviced lots and the most prestigious of the 4 phases in the development. Phase 4 was listed for sale for 12 months but generated no compelling offers, so we pulled the listing in April and decided to be listed later in this year.One of the reasons for doing so was that the Calvary housing market was beginning to strengthen for the first time in 4 to 5 years, and we hope to take advantage of that trend. That market has indeed strengthened, and we're now moving to relist the property. We have had the property reappraised, interviewed real estate agents and selected a realtor to list the property once court approval is obtained, which will probably occur in late November. We are anticipating a loss on the sale of Phase 4, but we have had a specific provision in place for several quarters to deal with that loss. This is the only loan in the portfolio, by the way, where we do expect to incur a loss.The second loan in default is a CAD6.15 million first mortgage in Southern Ontario. This loan is in default due to an excessive amount of debt subordinate to Atrium and an uncooperative borrower, who was removed over a year ago from operations in favor of a third-party development manager. Atrium actually holds the senior tranche of the first mortgage and has an estimated loan-to-value of only 64%. So clearly, we do not foresee a loss. The reason that the loan is in default because the private receiver was needed to be engaged in order to prevent the borrower from interfering with the development process.The final borrower is in default had 4 mortgages totaling CAD45 million in Vancouver. I can best describe the borrower as acid rich and cash poor. In Q2, we successfully negotiated a forbearance agreement, whereby the borrower was forced to list the properties for sale with real estate agents approved by Atrium and has until early December to sell the properties after which time Atrium will assume control of the sales process. A good news, 3 of the 4 loans totaling CAD37 million are secured by well-located development sites near a major Skytrain station.These 3 loans are also cross-collateralized. All 3 loans have loan-to-value -- loan due appraised values of less than 75% and are considered very marketable properties. In fact, 2 of the properties have been sold at prices above Atrium's loan exposure, one is a firm sale, while the other is conditional until mid-November. A fourth loan totaling CAD8.1 million is a first mortgage secured by an apartment building. And a conditional offer has been accepted on that property as well with a waiver date in mid-November. So we hope next quarter to report the 3 of the 4 properties affirm sales in place.Defaults on the single-family mortgage portfolio were minimal, totaling just CAD1.47 million. And since quarter-end, one of those loans was repaid in full and another of those properties has been sold by the borrower with a closing date in December. Overall, we feel very comfortable with the quality of the portfolio. Please note that we analyze and risk weighs each loan, every quarter to make sure we're on top of any new issues.Turning to our foreclosures. We continue to have 2 foreclosed properties totaling CAD16.1 million, the first is a Fourplex in Leduc and the second a 9 unit rental project in Regina. The Leduc cost base is CAD1.1 million and the cost base in Regina is CAD15 million. The Fourplex was a 100% leased throughout Q3. The Regina apartment finished the quarter with an 84% occupancy rate. We have recently increased the level of digital marketing and the property manager is now reporting increased traffic at the property. These properties generate significant distributions to Atrium each quarter.Our economic outlook is as follows. Although, the overall economy contracted by 1.1% in Q2, the Bank of Canada is still forecasting 5% GDP growth in 2021 and 4.25% growth for 2022. The primary causes for the slowdown have been the service sector recovering less quickly than hoped and supply chain issues. Growth prospects are forecasted to improve in Q3 and Q4 assuming a continuing reopening of the economy and widespread adoption of vaccine passports. A Labor shortage in many industries, including food and hospitality and supply chain issues in manufacturing have jointly stimulated inflation. Inflation is currently at 4.4% in Canada and forecasted to increase to 4.75% by year end. Most economists believe that the increase in inflation is temporary and that supply chain issues will work themselves out by mid-2022. However, some prominent business leaders, including Dave McKay, CEO of RBC and Louis Vachon, CEO of National Bank believe that labor shortages and supply chain issues will persist for a longer timeframe, which will result in a more prolonged period of inflation.In the real estate sector, there are lot of conflicting issues which could affect the strength of the housing market in the coming year. Negative trends includes the supply chain issues, labor cost increases and higher mortgage rates. But offsetting those trends are continuing price increases supported by a very tight resale market and an expectation of increasing immigration levels. In Q3, the housing market performed very well in our target markets. First looking at resales, September saw the transition from the slower summer market to the busier fall market as listings and sales began to increase after Labor Day. In the GTA, the resale housing market saw a significant increase in sales activity compared to the same period in 2020, while new listings were down by a third driving an increase in average prices on both the month-over-month and a year-over-year basis. Sales growth was strongest in the condominium segment.The average price of a detached home in the GTA increased by 29% year-over-year, while semi-detached homes and townhouses increased by 21% and 22%, respectively. Condo apartment resale prices continued their climb up and were up 12% year-over-year in September point to a renewed confidence in and demand for downtown urban lifestyles.In the Vancouver area, the situation was similar. September sales were 21% above the 10-year average for the month. Total listings were down 30% year-over-year. Total listings are 28% below the 10-year average for the month. So the sales to active listings ratio remained robust for all property types in September. The ratio was 26% for detached homes, 53% for town homes and 37% percent for condominiums. The Real Estate Board reports an upward price pressure is typical for ratios above 20%.In Greater Vancouver, year-over-year, the benchmark price for detached homes was up 20%, 18%for town houses and 8% for condos. The new home markets in Toronto and Vancouver are also very healthy. The GTA's positive story about the resale market was also evident in the new home market. New home sales through the end of August increased by 36% when compared to the same period in 2020. The number of high-rise sales were up 63%, while low-rise sales saw an increase of 2%. On a year-over-year basis, high-rise inventory decreased by 13%, while low-rise inventory decreased by 62%. The benchmark price of CAD1.52 million in August for a new low-rise product represents a 30% increase on a year-over-year basis and a slight increase from the previous month. The benchmark price for new high-rise product increased by 10% year-over-year to CAD1.7 million. In Q3, we saw the price gap between low rise and high-rise continue to widen as it has since the pandemic started, making condominiums more affordable on a relative basis.In Vancouver, the most recent new home sales stats are from Q2, new condo sales for Q2 totaled 6,500 units in Metro Vancouver, only 3% less than the peak sales figure achieved in Q2 of 2016. The ratio of sales between the North and South of Fraser markets narrowed to 1.3% in Q2 versus 1.6% in the previous quarter. This reflects the sustained strength of demand in the more affordable suburban submarkets as well as fewer project launches in the more expensive North of Fraser markets.Although demand remains strong, the release of new condominium inventory outpaced demand. There were 1,230 more unsold units at the end of Q2. However, standing inventory of completed units remained very low at 514 units. Although this represents an increase of 22% over Q1, it is still down 17% on a year-over-year basis. To summarize, the resale and new home markets in both cities are very strong and this trend is expected to continue into 2022.So to summarize the quarter, Atrium continued to generate strong earnings in Q3 as it has throughout the pandemic. The loan quality is also very high as evidenced by the following risk metrics: First, our loan to value ratio on a portfolio basis has remained steady at approximately 60% to 61% loan to value throughout the pandemic. Number two, 96% of our portfolio is composed of low ratio loans described as loans below 75% loan to value, and almost 88% of the portfolio are first mortgages. From a sector perspective, we are well-positioned with 82% of our loans focused on the strong residential housing markets. And lastly, geographically, we've targeted our portfolio towards the most liquid urban centers in the country; Toronto and Vancouver. We are looking forward to Q4 and completing one of the best years in our 9-year history as a public company.That's it for our presentation, but we would be pleased to take any questions from the listeners.
[Operator Instructions] Our first question comes from the line of Graham Ryding from TD Securities.
Just want to be clear, it sounds like your expectation with the portfolio is perhaps going to contract in Q4 and then build in 2022, is that the right message?
Yeah, if I was to guess today, yeah, that's the way we would feel. We do have a pretty strong pipeline of new deals, Graham, but Q4, as you know, is really 2.5 months in terms of business, new business, because from basically December 15 onwards very few new loans were fund, they would be deferred till the beginning of the year. If it was a normal 3-month period, we might well end up where we ended up this quarter, but I think we'll be slightly short just because inevitably some closings get deferred.
Okay. It sounds like what you thought was going to get repaid this quarter if some of that's been deferred to Q4, or that's what's driving that dynamic?
That's right. That's right.
Okay. And then in terms of your weighted average mortgage rate, the outlook for interest rates to potentially keep moving higher here, would you expect that to translate into higher average mortgage rates for you as well or is it more of a competition and is difficult to predict on that front?
So my guess is in Q4 because our largest remaining loan over 75% loan to value, which has a high coupon on it, comes off the books, my guess is, we'll see a small contraction in the average mortgage rate in Q4, but I think that will be the bottom and I think for probably from that point forward, we'll be moving up because it's very unusual for us to have 1% of our portfolio and loans over 75% loan to value. It's not that we're adverse to having at 5%, 7% even up to 10%, but we got to be really comfortable with the transaction and we haven't seen that type of opportunity now that we want to take advantage of. But when we do, it'll start moving up the average rate. Did that answer your question?
Yeah, I wasn't just talking about Q4, it was next year as well, but I think I got your message. And then on the interest cost side, your credit facility its variable, so it is going to move with the prime rate, is that how we should think about the interest cost side?
Yeah, prime and bankers acceptances. I would say, more bankers acceptances than prime.
Yeah. We keep -- we are very little on our prime facility, majority over 90%, 95% are on the BAs at any one time.
Yeah. I think most large corporations will use the BA facility more than they will prime because it ends up being normally less expensive than prime.
Okay. And then my last question, just when I look at sort of the mix of your portfolio, there has been a noticeable increase over the last few years towards sort of mid and high-rise and less on the low rise side, is that deliberate or is that more of just a reflection of growth in BC and the nature of the letting tends to be more mid-rise than high-rise?
Yeah, it's partly a reflection of BC. You know what we find is the banks are really, really aggressive on low rise. So it's hard for us to find opportunities that are attracted to us where the risk profile is still low. Mid-rise and high-rise tend to be more capital intensive projects as there is just more opportunity for us. I wouldn't say the low rise is going to continue to go down, but it was maybe artificially high for a while, because we had a very, very large client who paid us off on 3 loans, I think in one quarter, yeah, he was maybe our largest client in the entire portfolio and he was a low rise player. I don't know that he is going to go, he is very wealthy, but don't think he is going to go into developments of that size again. So we will have to find the business elsewhere. And so, I think probably the portfolio composition we have now is probably more reflective of what it will look like in future.
Your next question comes from the line of Sid Rajeev from Fundamental Research.
Thank you and congrats on your record lending. I'm trying to get an idea about your exposure to first mortgages now at record highs. You talked about your pipeline being robust, strong. Can you give us more color on what are the new deals looking like, are they mostly first mortgages? It seems like Ontario is going to continue to dominate your mix, but can you talk a little bit about the deals in pipeline?
Yeah. The pipeline is pretty diverse now. Jennifer, I would say, what, at least 75% of it would be first mortgages.
Yeah.
I don't have it in front of me, I'm sorry, but probably 75% or so are first mortgages. So you might see the 88% come down marginally, but it probably won't be a huge number, but it'll still be higher than what we would normally have in first mortgages.
Is it fair to say that lending rates -- the average lending rates might increase by year-end, portfolio average?
No, I don't think so because as I mentioned in my discussion earlier, we have 4% of our loan portfolio and over 75% loan to value, and it's only 2 loans that are by far the largest of the 2 loans is scheduled to be repaid within the next 2 weeks. And so it has a high coupon, I think it's got a coupon of 10.75%. So when it comes off, naturally going to drop the overall rate of the portfolio. Having said that, what's going on, I think are reasonably healthy interest rates, but they're not 10.75%. So I think that there will be a little bit of a drop in Q4 and then I think you'll see it either steady or moving up slightly in 2022, if I was to guesstimate.
Got it. Just one more question, your debt to capital is lower, you have enough room in your line of credit for accessing capital, but share prices are high, close to record highs, I feel that you might be tempted to do equity financing. Is that something in the works or...
Yeah, we look at the benefits of all three of the sources of our balance sheet, which is equity. We're trading well. We think we should trade a little higher, but we can't say we're trading poorly. The subordinated debentures, last one done, in the MIC industry it was at 5%. So that started to make more sense to us because there is a lot of costs that go with the subordinated debentures. And then our line of credit is the cheapest, but it's also got a short-term to it, right, it's 1 or 2-year term. So it's got the least -- it's the least expensive source, but it's also got more risk in terms of the fact that a convertible debenture has a 7-year term, equity has an infinite term. So you want to sort of balance the three. So they are all attractive in their own way. But we have talked about convertible debentures a little bit more, whereas when they were at 5.5%, 5.75%, we really weren't interested and equity is a possibility as well when we're ready.
[Operator Instructions] Our next question comes from the line of Li Chen from iA Capital Markets.
Just a quick one for me and I apologize, might have missed it. Rob, you mentioned that most of the loans you see that are repaid or structured as around 2 years. So what about your loans for your pipeline. Should we expect around the 2-year term as well or somewhere along those lines?
Yeah, the loans are almost always somewhere between 12 and 36 months. And they would average 18, 24 months. So yeah, 2 years is a pretty good assumption that's why it's hard to believe we'll have the loan turnover in 2022 we got in 2021. So much of our book is -- was only booked 2021. So it's unlikely that portion of the portfolio will be repaid in 2022.
Right. I was just trying to get a sense of what -- if that high level of repayment was going to kind of persist in 2022, but yeah, that makes a lot of sense. That's it for me. Thanks so much. Have a good weekend.
Thank you.
And there is no further questions at this time. Speakers, please continue.
Okay. I just want to thank you for attending this conference call at 4 o'clock on a Friday. And thank you those of you our shareholders for your continuing interest in our company. Have a good weekend.
This concludes today's conference call. Thank you all for participating. You may now disconnect.