Atrium Mortgage Investment Corp

TSX:AI

Welcome to the Atrium Mortgage Investment Corporation's First Quarter Results Conference Call. [Operator Instructions] A reminder that this conference is being recorded, Wednesday, May 14, 2025.

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 upon 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.

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

Thank you for calling in today. Our interim CFO, Razvan Vulcu, will start by talking about our financial results, and then I'll speak about our performance from an operational and portfolio perspective. Raz?

Thanks, Rob. Atrium had a solid start to fiscal '25, delivering Q1 earnings per share of $0.25, which continues to outpace our fixed dividend of $0.2325. First quarter revenues were $22 million compared to $25.2 million in the same period last year due to a decline in interest rates and the turnover of the portfolio. As expected, the rate on the mortgage portfolio came down from 9.98% at the beginning of the year, 9.56% at Q1, following two 25 basis points Bank of Canada rate cuts on January 29 and March 12.

Our strategy is to continue sourcing lower risk profile loans, which command lower rates in order to protect shareholder capital as we navigate through uncertain market conditions. Our credit facility being priced off prime and short-term core market rates, the average rate on the credit facility also came down to 5.38% over the quarter from 6.34% in the fourth quarter. Our gross mortgage portfolio ended the quarter at $875 million, down from $887 million at the start of the year. This reflects $119 million in principal advances, offset by $121 million in principal repayments, including a significant $62 million repaid on March 31 alone.

Stage 3 loans declined to $19.5 million from $29 million, primarily due to the repayment of a troubled loan in BC. We wrote off $2.6 million on this loan against an allowance of $3.1 million previously set aside. H2 loans increased during the quarter following the addition of a $21.7 million commercial loan that entered interest arrears, borrowers committed to rectifying the interest arrears.

Stage 1 provision still remains high, 109 basis points due to a soft macroeconomic outlook. As a percentage of the mortgage portfolio, our allowance for mortgage losses remains healthy at 333 basis points at Q1, which is consistent with the beginning of the year. We continue to maintain a strong, liquid and well-capitalized balance sheet. As of Q1, balance sheet debt remained low at 39% with $219 million drawn on our $340 million credit facility, leaving ample available capacity.

During the quarter, we repaid our $28.7 million debenture using the credit facility. We also retained the flexibility to do the same with our upcoming December maturing $34.5 million debenture should market pricing for new debenture issuances remain elevated. Overall, Q1 was a strong and consistent quarter in terms of financial performance for shareholders. We continue to adhere to our established risk appetite in terms of new opportunities, remain disciplined with respect to operating expenses and maintain a strong balance sheet that will withstand stresses from the current cycle downturn.

Rob, I'll pass it back to you for business and portfolio updates.

Thank you. As Raz said, we had a strong first quarter of the year. Atrium generated basic earnings per share of $0.25 in Q1. We increased our loan provisions by $2.2 million, which is similar to last quarter, but has been gradually reducing over time. To date, we've never had any problem loans where our provisions were inadequate. In fact, in virtually every circumstance, there's been a net recovery. Overall, the portfolio decreased very slightly from $887 million last quarter to $875 million in Q1. But for much of the quarter, we actually had a portfolio balance in excess of $900 million. In fact, on the final day of the quarter, we had $62 million in loan repayments.

In Q1, loan advances were actually very strong at $119 million, which is a really solid quarter for us, even under normal market conditions. Loan repayments in Q1 were also unusually high at $121 million. Based on the last 2 quarters, we've had an annualized portfolio turnover of more than 55%, which is a testament to our loan quality. We've also made good progress implementing CMCC's strategy to increase our exposure to commercial loans and single-family mortgages. Commercial loans rose to 24%, and single-family and apartment mortgages were 17.2%. These 2 lower risk sectors now represent over 41% of our total portfolio, and we expect that trend to continue in calendar 2025.

Atrium's average mortgage rate dropped to 9.56% due to 2 basis points -- two 25 basis point reductions in the prime rate of interest, but also our high portfolio turnover is meant that higher-yielding loans, which were funded when prime was elevated or replaced with loans at today's lower market rates. The total of high ratio loans, that is loans over 75% loan-to-value was only $32 million in Q1, equal to just 3.7% of the portfolio. This total was down dramatically from a year ago when the balance was $78.6 million, equal to 8.8% of the portfolio. And in Q1, the average loan-to-value of the portfolio dropped from 64% last year to 61.1% today, which continues to be well within our desired range.

Atrium's percentage of first mortgages remained very high at 96.7%. Construction loans represented only 3.6% of the total mortgage portfolio. Construction costs have become more stable in our target markets, and in the case of the GTA are actually dropping, so we are now more willing to consider underwriting construction loans with experienced developers.

Turning to Stage 3 loans. In Q1, the total of Stage 3 loans dropped from $29 million to $19.5 million. Our total Stage 2 and Stage 3 loans combined also continues to be the lowest amongst our publicly-traded peer group. There are only 2 commercial loans -- 2 commercial and multi-residential loans which are our Stage 3 loans, and I'll briefly describe each of these loans. The first is a $14.5 million first mortgage secured by a townhouse site based in Langley, BC. Due to unanticipated changes to the city's neighborhood plan and infrastructure requirements needed from the city, the development time frame for this project -- actually for all projects in this region has been extended. The property is listed for sale, and we are comfortable that our loan loss provision is adequate.

The other loan is a $2.85 million loan secured by 3 Toronto office buildings. In Q4 of 2024, we negotiated additional security and anticipate a substantial paydown of the loan by the end of Q2. Once received, we will likely have a full recovery of this loan and a reversal of the loan loss provision in place. As mentioned earlier, we increased Atrium's loan loss reserve in Q1 by $2.2 million. The loan loss -- the total loan loss reserve is now a very healthy $29.1 million, equal to 333 basis points on the overall portfolio. It's worth noting that we increased the general reserve against our highest quality Stage 1 loans to 109 basis points. We strongly believe that we have adequate provisions in place, which will protect profits in the future.

I'm also very pleased to announce that we have preliminary approval for a 2-year extension of our $340 million line of credit. The renewal terms are identical to the pricing and terms that we currently enjoy. We expect the renewal to close before the end of May. I'd like to thank TD Bank, our lead lender for managing that process. The economic news globally and within Canada has weakened considerably since the U.S. government commenced its trade war involving tariffs in most countries across the world. In Canada, GDP contracted by 0.2% in February and the U.S. economy contracted by 0.3% in March. Not surprisingly, CPI in both countries has dropped recently. In Canada, CPI slowed to 2.3% in March, down from 2.6% a month earlier.

The IMF has forecasted Canadian GDP growth of 1.4% in 2025, but other economists have projected much slower growth. Truth is, it's impossible to forecast economic output until the trade war settles down, and we have a better idea of the outlook going forward. With the Canadian election concluded, the Prime Minister can now commence negotiations with U.S. President, Donald Trump, and hopefully reduce the burden of tariffs impacting Canada.

Turning to the real estate markets and in particular, the commercial real estate market, national cap rates continue to hold steady in Q1 with the average cap rate decreasing by 1 basis point to 6.67%. Marginal changes in cap rates were seen across the asset classes with retail, multifamily and industrial cap rates dropping slightly, while office cap rates continued at a very gradual upward ascent. Most commercial real estate sectors are actually performing quite well, including multifamily, retail, industrial and seniors housing.

Looking at the residential and multi-residential real estate markets, and first at resales, in the GTA, resales in April were up on a seasonally adjusted basis from last month, but still down 23% from April 2024. New listings were up 8.1% year-over-year, and the MLS composite benchmark was down 5.4% year-over-year in April. GRAB is still forecasting a 12.4% increase in sales and a 2.6% increase in the average price in 2025. Similar to the GTA, resales in Metro Vancouver in April also declined by 23% on a year-over-year basis. And newly listed properties dropped by 3.4% from last year, but are still above the 10-year average. The sales to active listing ratio was 13.8%, which is on the lower end of a balanced market. The home price index in Metro Vancouver was down 1.8% from a year earlier, and 0.5% from last month.

Turning to new home sales. The new home market remains extremely slow. In the GTA, new home sales in Q1 decreased by 53% compared to the same period in '24. Number of high-rise and low-rise sales both declined year-over-year, with high-rise sales falling more significantly. The inventory on the market increased by 10% year-over-year, and the benchmark price dropped by 3.9% for low-rise and 3.2% for high-rise over the last 12 months. A combination of lower prices and higher construction costs have significantly impacted the profitability of new homes.

In Metro Vancouver, new home sales were marginally better. New sales in Q1 were down 28% from the previous quarter and 47% compared to the same quarter last year. There were 16 projects launched, totaling 1,300 units of new inventory, and they were 24% presold in Q1. We need the combination of further declines in construction costs. And by the way, Altus has suggested or has indicated, the costs are down 15% already from their peak in the GTA, and we also need sustained price appreciation in the resale market before we see a recovery in the new home market.

To conclude, I'm very pleased with our first quarter results from both an earnings and portfolio quality perspective. Our underwriting teams originated almost $120 million of new business loans in Q1, which is well above our historic average and is particularly impressive in a market that has a little activity. We have begun to notice slightly less competition in the nonbank sector, and we're hopeful that Atrium MIC can pick up market share over the next year or 2.

What is within our control is continuing to maintain a defensively positioned portfolio and to continue to underwrite new loans on a disciplined basis. So we have been attempting to lower the risk profile of the portfolio by targeting lower risk sectors and not chasing yield. As I've reminded you in the past, Atrium's results during past downturns has been exceptional. So we've proven we know how to build a strong portfolio of loans that is resilient to market downturns. In particular, we reduced our portfolio loan-to-value over the last 12 months from 64% to 61.1%, and the percentage of conventional mortgages has increased from 91.2% 12 months ago to 96.3% at the end of Q1.

Our Stage 3 loans has also dropped to just 2.2% of the mortgage portfolio, which is the lowest level since Q2 of 2023. Our annualized loan turnover has risen to approximately 55% over the last 2 quarters, which is unusually high and is a testament to the quality of the loans in the portfolio.

In summary, our earnings are strong, our portfolio is in very good shape and we're well positioned to take advantage of opportunities in the market. That's all for the presentation, but we'd be pleased to take any questions from the listeners.

[Operator Instructions] First question is from Sid Rajeev from Fundamental Research.

Thank you, Rob, and congrats on a strong Q1, especially the steep reduction in Stage 3. I have a few questions, if I may. We're already halfway into Q2. Do you anticipate receivables to increase by end of the quarter? Or how do you see the pipeline?

Sorry, do I anticipate a portfolio size increase?

Yes, mortgage receivables increase.

At this point, my best guess it would be probably treading water, which, believe it or not, is pretty good in this market because I think you'll find many portfolios that are actually shrinking in size.

And your near-term focus is on commercial and single-family. Historically, these sectors have been highly competitive. So do you anticipate your average lending rates to decline more than the market rates?

Well, I'd say that happened this quarter. We're going to increase our pricing a little bit going forward. So there might be some drop. I'd say one of the biggest contributors to the drop in pricing that we had is that we had older loans that were priced higher. They've hit their floors on the rate. So we were getting unusually attractive yields on those deals. And then when we go and do a new deal, it's obviously at current rates with the floor that's based on current rates, and so you lose out what came off, was it an artificially high spread. And what comes on has a decent spread to it, but it's not as attractive as the one that was repaid.

So I'd say it was sort of a combination of a lot of loans, as I mentioned, $62 million of loans being repaid on the last day of the quarter, and about [ 50 ] of those loans had very high yields to them. So that was a contributor. You're right, probably doing more commercial and single-family is slightly lower yielding, but not that much. I'd say it was more of the portfolio turnover that caused it. And because we've had so much portfolio turnover, that will become a lesser and lesser effect going forward. Unless Bank of Canada rates start to come down steeply, which was not the case, obviously, the last month or 2.

Got it. In terms of turnover, $118 million in originations or advancements this quarter. What percent of that, just to get an idea, was, I mean, new loans rather than renewals?

How much was new loans versus advances under existing loans? Is that what you are asking?

Yes.

So at least $100 million of it was brand new loans.

That really shows. Okay. Got it.

Yes. No, our team did a really good job originating good quality stuff in Q1.

It just shows there are a lot more new projects out there -- development projects, construction projects out there than last year.

Well, there's actually not that much that's coming up for construction. We don't have much of a construction portfolio. These -- one of the big deals we did was a refinancing a project that was retail at the front of -- it was sort of a suburban commercial project with retail at the front and industrial buildings at the back. And we teamed with a pension fund, and we were competitive enough to do the deal. So there are all different types of transactions that are happening. But development is obviously really slow. So most of the loans we're doing are not development loans.

Okay. And just 1 more question. Ontario exposure keeps increasing. I know you don't have province-wide targets. But what specifically are you seeing in Ontario versus, let's say, BC?

Well, we have 12 underwriters for Ontario. So we have a really good knowledge of province of the GTA in particular. And we've been here since 2001. So in fairness to the Vancouver operation, there's 2 underwriters as opposed to 12. But I also think you'll see some activity in Vancouver in BC in Q2 and going forward.

It's fair to say that it's not like you're seeing more opportunities in Ontario. It's just that you have a larger team there, that's it?

Yes. So you naturally see more opportunities because you just have more contacts, more awareness in the market of who Atrium is. I mean, we're pretty well known in Vancouver as well, but our portfolio is $800 million or thereabouts. Over $800 million, just almost in the GTA alone. So we're very well known in the city.

Next question is from Graham Ryding from TD Securities.

Maybe just broadly, the size of the portfolio as you're sort of looking through the rest of this year, try to factor in, I guess, that the market is pretty soft in some areas? Or what's your expectation for your ability to grow the portfolio from the current levels?

I mean, we're trying to grow it. And if we had normal turnover, it would be growing. So it's not only how much business we can bring in, it's how much business is being repaid. As I've mentioned before, a lot of our repayments come from the big 6 banks. And they're still actively lending for bankable clients. And most of our clients are bankable clients. They're using us for a specific purpose as opposed to the fact that they may not be bankable with the big 6, almost all of them are. But we're hoping to increase this. I mean, I'd love to get the $900 million. Do I think we could get there? It's really hard to know. Because the repayments have been faster than we expected. We've actually done a really good job of booking new business, but it's been entirely offset by repayments. That's not much of an answer I know, but it's the best I can do right now.

No, it's helpful that you want to get to $900 million, but it's not necessarily in your control sometimes. That's fair. On the stage loans, can you just -- and if I missed it on the call, I apologize. But on the Stage 3, there was something that was written off in the quarter. Can you remind us what that was? And then it looked like there were actually some mortgages that improved or cured in the Stage 3 bucket. Can you flag what those were?

Yes. So there were 3 loans last quarter, Graham, and one of them, we knew we're going to lose money on. We had it provisioned. And it was -- we actually ended up selling the mortgages as opposed to the property. I've only seen that a couple of times in my career because there's always interest in doing that, but it never seems to come to fruition. This time, it did. So it was a very quick closing. That was part of the appeal to us because, obviously, interest is accruing and not being paid. And we ended up having, Raz, a small net recovery on that one, right?

That's right. Yes.

But it wasn't a big surprise we were going to lose money on it. And fortunately, we'd reserve more than what we lost.

And then were there some others that cured in the quarter in the Stage 3 bucket?

No, but it's -- I don't think so. Is it?

So on the single-family side, we had 1 loan that got repaid for a small loss, about $70,000. So 3 single-family homes remain in the Stage 3 bucket.

So there may have been a net improvement on the single-family Stage 3s?

Yes.

Sorry, I always forget about single family once I end up focusing on the larger ones.

That's fine. And then on the -- in the Stage 2, it looked like it was fairly stable in most areas, except on the commercial side and increased a little bit quarter-over-quarter to $28 million. Any -- is that 1 loan? Or is there a group of loans? Any color on that? Or just your [indiscernible] level there?

I think it went up by $23 million on the commercial and multi-residential side. It was essentially -- it's essentially 1 loan. And it's an industrial project, very strong guarantor. I think it's working itself out. It's more of an ownership dispute that caused this, but we have a very strong guarantor, and we've sort of allowed him a little bit of time to resolve that issue. I think the loan is fine. We don't think we're anywhere near 100% loan-to-value, put it that way, plus we have, as I mentioned, a strong guarantor.

Okay. And then the $120 million in originations in the quarter. Could you sort of describe the key buckets that those originations were from in terms of sort of the assets because I think the GTA condo market seems like there's probably not a lot of activity there.

Do you have that, Raz. I don't have that off the top of my head. I know about just under $20 million of it with single-family. I think a big portion of it was commercial like $50 million maybe of commercial. Sorry, hold on for a second. I didn't have that one. Only 18 on commercial?

Low-rise $31.5 million. Mid-rise, $11 million.

So it was pretty spread out.

Yes.

It must have been the quarter before that we had the large loan that we did on commercial.

Yes.

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

Okay. Thank you all for attending the conference call. We're pleased with the results. I hope you guys are as well. For existing shareholders, thank you for your continued support. Thanks very much.

Thank you all for participating. This conference call has now concluded. Please hang up.