Welcome to the Atrium Mortgage Investment Corporation's Fourth-Quarter conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you have a question, you will be asked to press star two on your touch-tone phone. To lower your hand, just press star two once more. As a reminder, this conference is being recorded Friday, 16th February , 2024. Certain statements will be made during this phone call that may be forward-looking statements. Although Atrium believes that such statements are based upon reasonable assumptions, actual results may differ materially. Forward-looking statements are based on the beliefs, estimates, and opinions of Atrium's management on the date the statements are made. Atrium undertakes no obligation to update these forward-looking statements in the event that management's beliefs, estimates, or opinions, or other factors change.
I would now like to turn the conference over to your hosts, Mr. Goodall, President, and Mr. John Ahmad. Please go ahead.
Thank you. Thanks for calling in today. Our CFO, John Ahmad, will start by talking about our financial results, and then I'll speak about our performance from an operational and portfolio perspective. John?
Thanks, Rob. Atrium produced another solid quarter in Q4 to cap off what was a record year in terms of financial performance for the company and its shareholders. Business produced EPS of CAD 0.27 in the fourth quarter and an EPS of CAD 1.18 for fiscal 2023, which is up 9.3% from the previous record set in 2022 of CAD 1.08. This output was achieved despite much slower real estate market conditions and increased credit risk that resulted in higher provisions compared to the prior year. Gross mortgage portfolio ended the year at CAD 894 million, which is up from CAD 876 million in Q3 and CAD 867 million from the beginning of the year. High inflation and high interest rates combined with weaker demand for finished-end product have resulted in less capital deployment into real estate projects and reduced financing options for borrowers.
However, Atrium has been able to source strong risk-adjusted opportunities due to reduced competition in these market conditions. Total principal advances for the year of CAD 282 million were down from CAD 517 million last year, but repayments were also down to CAD 264 million from CAD 430 million, which is what we would expect in this current environment. Benchmark interest rates remained flat over the quarter, as did the percentage of mortgages that are priced off floating rates. 89.8% of the portfolio at year-end was priced off floating rates, with most having rate floors in place. This percentage is similar to Q3 but up significantly from 75.4% at the beginning of the year. Our portfolio rate dipped slightly over Q4 from 11.49% down to 11.42% due to flat rates and the focus of sourcing lower-risk-reward mortgages during the quarter.
In fact, about 40% of the CAD 38 million of principal advances in the quarter were driven by single-family homes, which have lower rates attached to them. Our funding structure remains comprised of a combination of convertible debentures, a credit facility, and equity capital. The convertible debentures are fixed at favorable rates that don't mature until beginning mid-2024 at the earliest and are staggered between 2025 and 2029 thereafter. Credit facility, which does move at prime, represented just 25% of our total sources of funding. The weighted average rate on our credit facility did increase to 7.19% this year compared to 4.57% in the prior year as a result of increases in the prime rates of interest. Prime went up 400 basis points over 2022 and 75 basis points over 2023. Overall, the business remained very low leverage, with about 55% of our balance sheet funded by shareholder capital.
During the fourth quarter, we recorded a CAD 4.8 million provision to bring the total year amount to CAD 11.9 million, which is a significant increase over the prior year. This implies that the allowance for mortgage losses has increased from 124 basis points at the beginning of the year to 253 basis points at the end of the year. Stage one general reserve comprised 104 basis points of this total provision and remains elevated due to the weak outlook of key macroeconomic indicators employed in our ECL model, such as unemployment, housing prices, and GDP growth. The increase in allowance this year was mainly driven by a higher assessment of individual loans in stages two and three , both of which have increased over the course of the year. These increased assessments of higher credit risk are consistent with the weak real estate market conditions that have impacted Atrium and all market participants.
By prudently increasing our provisions for this increase in risk, the business still managed to produce record earnings for shareholders, which is a testament to our resiliency of our business model. All other operating expenses were more or less in line with expectations and consistent with our low-cost operating model. So overall, 2023 produced the strongest earnings in the company's history. As a MIC, it is our practice to distribute all taxable income earned in a given year to shareholders in order to avoid paying corporate income tax. We do this in the form of our regular dividend, which is currently set at CAD 0.075 a month or CAD 0.90 a year, and our annual special dividend at year-end, which is intended to distribute taxable income earned in excess of the base dividend paid throughout the year.
Our earnings performance for the year implies a record special dividend amount of CAD 0.29, which will be paid to shareholders on 29th February . Despite our strong performance, we continue to think and plan ahead and position the business for what we believe will continue to be challenging conditions going into 2024. Last year, we extended our credit facility for two years under favorable terms. We sold a major investment property for a slight gain on book to create additional funding capacity. And most importantly, we continue to employ a very defensive approach to lending in order to manage credit risk during these uncertain times. We continue to employ low leverage, ensure adequate funding capacity for growth and liquidity purposes, and maintain a deep bench of talent, strong relationships to position the business for future growth and the market inevitably returns. Rob, I'll pass it over to you.
Okay. Thank you. As John said, we had an extraordinary year. Atrium MIC generated basic earnings of CAD 0.27 per share in Q4. For calendar 2023 as a whole, EPS was a record CAD 1.18 per share. This result was considerably higher than our previous record of CAD 1.08 per share achieved only last year. In Q4, we again increased our loan loss provisions significantly to CAD 4.8 million for the quarter. As you know, we've always been proactive in making loan loss provisions. This decision is consistent with the actions of most financial institutions, including the Schedule A Banks. Overall, the portfolio increased from CAD 875 million in Q3 to CAD 894 million in Q4. Loan advances were CAD 38 million, and loan repayments were uncharacteristically low at CAD 25 million. We expect much higher repayments in Q1 2024 and expect that the loan portfolio will actually decrease in size.
Atrium's average mortgage rate dropped slightly from 11.49%- 11.42% in Q4. This was due to the fact that a significant portion of new loans were single-family mortgages priced at 9.49% per annum. Approximately 90% of our loans are now floating, but given the rates have peaked, we're no longer concerned about structuring loans on a floating-rate basis. Atrium's total of high-ratio loans, that is, loans over 75% loan-to-value, remained very low at 6% of the total portfolio. There are four high-ratio loans in the commercial and multiresidential portfolio totaling CAD 44 million. We were recently advised that one of those loans, which has always been in good standing, will be repaid by a Schedule A Bank by the end of Q1. There were also CAD 10 million of high-ratio single-family loans with loan-to-values ranging from 75.9%-93.7%. Atrium's percentage of first mortgages remained near a record high at 94.6%.
Construction loans represented only 4.5% of the total mortgage portfolio, down from 7.2% last quarter. We view construction loans as the most risky type of loan today because of frequent cost overruns and significant time delays. In Q4, the average loan-to-value of the portfolio was steady at 61.5%, which continues to be well below our target of 65%. Turning to defaults, I'll review the commercial and multiresidential loans in default in the portfolio. First is a project in Sutton, which we've spoken about previously, about CAD 2.7 million balance. We expected this loan to be repaid in full by year-end, but the registration process has been slow. We now expect it to be repaid just before the end of Q1 with full recovery. The next is the Markham Townhouse site owned by StateView Homes with a balance of around CAD 20 million. The project has been sold.
Due diligence conditions have been waived, and the closing date is scheduled for 26th February . Next is the North Vancouver loan, which has a balance of CAD 48.1 million. This is a 4.5 acres site that is fully approved by a mix of multiresidential buildings having a gross floor area of approximately 300,000 sq ft. The property was appraised earlier in the year by a respected appraisal firm for CAD 83 million, implying a loan-to-value of 58%. Reports granted the borrower until mid-March to repay the loan. After that date, Atrium intends to list the property for sale. We anticipate hiring a realtor to sell the project by the end of April or early May, assuming that the loan is not paid off by the borrower before that time. The remaining four loans are located in Greater Vancouver, total CAD 38.5 million, and they're connected to a single sponsor.
As a result of ongoing legal proceedings, I'm unable to speak in much detail about the loans, but I will tell you what I can. The loans range in size from CAD 3.7 million-CAD 13.2 million and are secured by low-rise development sites, mostly townhouse sites, in Langley, Richmond, and White Rock, all of which are part of the Greater Vancouver area. One is a construction loan, and the other three are bridge loans. We believe we have potential impairment on two of the four properties, and accordingly, we have made specific provisions for those two loans. The last loan in arrears is the only new one. It's a condo inventory loan in Vancouver. It's a CAD 20.5 million loan secured by 22 recently completed condominium units with an estimated liquidation or discounted value of CAD 25 million. The borrower has been successful in selling three of the 22 units in the last month.
In addition, we have an assignment of a CAD 10.5 million first mortgage on a parcel of land worth well in excess of that loan amount. We effectively have 35 million of security supporting the CAD 20.5 million loan. We don't expect to incur a loss. In order to properly address the impact from the continued weakness in the real estate markets, we increased Atrium's loan loss reserve in Q4 by CAD 4.8 million. You may recall that the loan loss reserve was also increased by CAD 5.4 million in Q3. I expect we will allocate larger than normal amounts to the loan loss reserve for the next several quarters. Atrium's loan loss reserve now totals a very healthy CAD 22.6 million, equal to 253 basis points on the overall mortgage portfolio. This is up from 203 basis points last quarter and 150 basis points in Q2.
A full 42% of the total loan loss provision is a general reserve for Stage I Loans, which are the lowest-risk loans. This means we have adequate provisions in place which will protect profits in the future. My economic commentary is as follows. GDP, as you know, has been very weak in Canada, falling by 1.1% in Q3. Thankfully, the preliminary result for November showed 0.2% growth. The forecast for Q4 is growth of 0.3%, and most bank economists are calling for stalled growth in the first half of 2024. Canada's weak performance contrasts with the United States, which posted 4.9% GDP growth in Q3 and 3.3% in Q4. U.S. consumers are generally less leveraged, and high rates have had far less impact. Canadian unemployment rate stayed steady at 5.7% during the quarter. The unemployment rate in Canada has increased by 0.7% since April, however.
Conversely, job growth has been impressive in the United States with an unemployment rate of only 3.7%. PPI in Canada rose to an annual pace of 3.4% in December, up from 3.1% in November. Shelter costs were yet again the largest contributor and are expected to account for nearly half of inflation over the next two years. The Bank of Canada is predicting that inflation will remain about 3% until the middle of 2024 and then return to its 2% target in 2025. At their latest meeting on 25th January , the Bank of Canada kept its policy rate at 5%, which marked its fourth consecutive pause in interest rates. The Bank of Canada has signaled that interest rates have probably peaked. The consensus among economists is that the Bank of Canada rates will drop in June and total 1%-1.5% by the end of 2024.
Inflation in the States dropped 3.1% in January, which may also encourage the Fed to drop rates by mid-year despite the strength of their economy. Turning to commercial real estate markets, according to CBRE, the national average cap rate rose 14 basis points in Q4 to 6.59%. For the full year, cap rates rose an average of 57 basis points. Office had the largest increase of 94-108 basis points, followed by industrial at 66 basis points, retail at 23-48 basis points, depending on the type of retail, and multifamily at only 18-24 basis points. In the GTA, multifamily cap rates in high-rise apartments were 3.35%-4.65%, while industrial cap rates were 4.75%-6%. In Vancouver, as usual, the cap rates were lower.
Multifamily cap rates in high-rise apartments were 2.25%-3.25%, while industrial cap rates were 4.25%-4.75%. Some major industry participants like Brookfield originally predicted the cap rates are at a turning point and falling rates will create a major tailwind in 2024. Looking at the residential resale market, January marked the second consecutive month of increased resale transactions across Canada and represents the first sign of a possible recovery in the residential sector. In the GTA, resales were up 21% and 10% in December and January, and there seems to be more optimism in the market. For calendar 2023 as a whole, there were roughly 66,000 home sales, a 12% dip compared to last year.
The number of new listings, however, also declined in 2023, and so the home price index in the GTA was down only 0.41% in 2023. In Metro Vancouver, the situation is very similar. Resales in December and January were up 3.2% and 38.5%. The number of newly listed residential properties increased by 14.5% but was still 9% below the 10-year average. January home price index increased by 4.2% year-over-year but was down 0.6% from the previous month. Turning to the new home market, sales of new homes remain weak across the country. In the GTA, there were 19,250 sales in 2023 compared to 25,400 sales in 2022. Year-over-year, high-rise sales fell 36% while low-rise sales increased 34% but from the very low base. For December, new home sales were very similar to the last year.
The benchmark price for high-rise and low-rise product dropped by 7.5%- 8.5% respectively on a year-over-year basis. Supply of unsold high-rise inventory has increased, but 90% of all units currently under construction have been pre sold, and there are only 617 unsold units of standing inventory. In Vancouver, the Q4 figures are not yet available for new home sales, but in Q3, Metro Vancouver's new multifamily home sales decreased by 25% compared to Q2 and was also 25% below the five-year third-quarter average of sales. Unsold inventory was up marginally from the previous quarter but down 4% from the previous year. Unsold inventory is 13% lower than the five-year average. Our view continues to be that a material recovery in the new home market will only begin once construction costs have dropped. Inflation has declined, and the Bank of Canada has signaled the drop of interest rates.
To finish, despite very challenging market conditions, 2023 was an exceptional year for Atrium and its shareholders. Atrium posted earnings per share of CAD 1.18, far exceeding its previous record, which was achieved in 2022. It's worth noting that our two best years of earnings as a public company were achieved in the midst of this major market downturn, and we were able to generate those record earnings while still expensing large loan loss provisions, which will protect future earnings. It's also worth noting that our earnings were also very strong throughout the last downturn in 2008 and 2009. Our special dividend this year of CAD 0.29 represents almost four months of our normal monthly dividends. We've been asked by several shareholders whether the board is considering raising the monthly dividend above CAD 0.075.
The answer is that it is regularly discussed at the board but that we want to be sure that real estate markets have recovered before doing so. We currently have three impaired loans on our books totaling CAD 36.7 million, but the good news is the largest impaired loan totaling almost CAD 20 million is scheduled to be repaid before the end of February. The new Vancouver loan that went into default in Q4 is very well supported by strong collateral that allows us to feel comfortable that there's virtually no risk of loss. Overall, the risk profile of the portfolio showed little change from Q3 to Q4. For 2024, we're targeting a higher proportion of originations in the low-risk single-family mortgage sector as well as certain commercial sectors. This strategy is aimed at de-risking the new loan business put on the books while real estate markets are weak.
Single-family mortgage portfolio had 54% loan turnover in 2023, which shows just how liquid that sector is. My sense is that the real estate markets will be soft for at least the next two to three quarters and that GDP growth will be negligible. We forecast that a market recovery should gradually occur by the middle of 2024 when real estate markets have bottomed, inflation has declined, and the Bank of Canada has begun to drop interest rates. In the meantime, construction starts I'm sorry will be depressed, which should lead to a material drop in construction costs. In fact, construction costs have already started to drop because trades no longer have a backlog of work. The most pronounced drop has been in low-rise construction, which has a shorter construction duration, but early trades like framing for mid-rise and high-rise construction have also begun searching for new contracts.
I remain confident that our team can manage our portfolio throughout the balance of this downturn. We've been actively managing our existing portfolio to identify weaknesses early and deal with them expeditiously. For example, we've sold subordinate tranches and some higher-risk loans over the last six months in order to de-risk the portfolio. We've also increased our proportion of first mortgages and kept the portfolio loan-to-value ratios well below our long-term target of 65%. Lastly, I'm pleased to announce that Richard Munroe, Chief Operating Officer, has been appointed to the role of President and Chief Operating Officer. Richard has been with CMCC and Atrium for 18 years, and this promotion recognizes Richard's increased role and importance at Atrium and positions the company to prosper for many years to come. I will continue to act as CEO for the foreseeable future and will remain fully engaged in the business.
Thank you. We'd be pleased to take any questions from the listeners.
If you have a question, just to start too, to raise your hand. And when you're ready, I will call your name and unmute your line. So I don't see questions as yet. Okay. First question comes from Rasib Bhanji . Rasib, please go ahead and ask your question.
Thank you. Morning, guys. Rob, first question would be so with Richard Munroe taking over as the President and CEO and I know you said you'll be you remain CEO for the foreseeable future. Any notable change in responsibilities or leadership, or how does this change things, I guess, operationally within Atrium?
Yeah. He'll gradually take over more and more responsibilities. He's running the bulk of the Toronto office which represents production office which represents over 75% of the total portfolio. He'll gradually be more involved in dealing with shareholders. But because I'm not leaving anytime soon, it'll be a gradual process, not a quick process. Understood. And then I think I heard on the call that you're targeting more single-family loans for 2024. Could you speak to more about why the change over there? Yeah. I think it's always been viewed as the lowest-risk sector within the real estate market. That's why it's competitive. It has the lowest spread of all the different sectors, but it's also the lowest risk. So if we look at what our loan turnover was John, if I'm getting the numbers wrong, you can help me.
It was something like 52% for the single-family and just under 30% for the commercial and multiresidential sectors. That tells you in a slow market, 52% turnover is remarkable. That tells you that it's still the lowest-risk sector. It's also the easiest to assess appraisals.
Appraisals are very difficult right now in the multiresidential and commercial sector because of a lack of transactions. But when you're looking at a single-family home, there's 5 sales within 2 blocks of any deal we're looking at. So you can very accurately assess value and have much more comfort in it. So we've hired a proven producer who's going to start with us on March 17th. So you probably won't see a big impact in Q2, but you'll see that impact growing in Q3 and Q4. Okay.
And do you have a target number for how big this portfolio could get?
It's hard to know because of the turnover.
We know that the guy who's coming with us last year generated as much as we're doing right now. So we're hoping it doubles in size. But it turns over more quickly. So the proportion will go up gradually. You won't see this huge jump from quarter to quarter.
Okay. And yes, just my last question.
That's helpful.
Yeah. It was. It was. Yeah. Thank you. I just had one last question on the credit side. So stage 2 loans have been increasing over time. I guess what gives you confidence or comfort that these won't transition over to stage three?
Well, I mean, some of them could. We think we've been pretty conservative, though, in what we've put into stage two. For example, we put one project in. I think it may have been in last quarter, and we actually had an 8% paydown in the principal balance. We just left it in stage two. So I don't think a lot of the stage two are going to gravitate to stage three, but the market is going to be difficult the next two quarters.
So you're not going to see any real estate lender have a big improvement in their portfolio quality. If you're maintaining your portfolio quality in this weak market, you're probably doing quite well.
I'll also add, let's see, that in stage two, I mean, we like to act proactively and prudently. So we actually have loans in stage two that you probably wouldn't even call in default.
No. Quite a few of them are not even in default. So we have, just because there is a significant increase in credit risk, like we feel that collateral value has decreased, we would recognize that as a stage two loan. So there is a good chunk of loans in there that are in there, and the borrower's making their payments, and everything is fine. But we are being prudent, looking at the collateral value, looking at the situation, the sector.
And if we feel it's higher risk, we will classify it as stage two. So it's certainly possible. Some loans could migrate, but I wouldn't say the profile of every single loan in there has that potential. Yeah. Some of the loans in stage two—a lot of the loans in stage two are not in default, and they're not over 75% loan-to-value. But as John said, there's something about it that makes us feel it's got higher than normal risk profile. So we've conservatively put them into stage two.
Okay. That makes sense. Thank you. I'll read to you.
If anybody else has a question, just hit star two on your phone. There's no other questions in the queue at the moment. Unless, sorry. Did you have another question, Rasib?
Yeah. Sorry. I just didn't want to take up all of your time. I just had a follow-up question from that. John, I think you mentioned that provisioning will remain high at least in the first half of 2024 as we deal with all the uncertainty and everything. I guess maybe going further out, let's say 2025 or when things have sort of normalized from a rate perspective and activity and credit and on the credit side, would you have a I don't know, directionally or even quantitatively, how much in allowances would you be comfortable holding after we're done through this uncertainty period?
So I can answer that. Historically, before this downturn, we always wanted to have in around 1% of the portfolio as a reserve, okay, in provisions. And we had virtually no defaults at that time, so that seemed like a reasonable number. Today, we have 1% in stage one loans as a reserve.
So we're trying to sort of maintain that, if you will. Do you understand what I'm saying?
Yeah.
We're trying to keep the same amount of allowance against what we view as our lowest-risk loans as we had before the pandemic, before loan losses and weak real estate markets became more prevalent. So we think we're well provisioned, put it that way.
Okay. Thank you.
I'll give a moment for one last opportunity to ask a question. And if there are no further questions, I will hand it back to Mr. Robert Goodall and Mr. John Ahmad for closing statements.
Okay. Thanks very much for calling in this morning. We had a lot of callers. Appreciate you getting up early on a Friday to listen to us. We're pretty proud of our results. For those of you who are shareholders, thank you for your continued support, and we hope you're pleased with the results and particularly the special dividend that'll be coming shortly. Thanks again.
Thank you, everybody, for participating in this call. Oh, sorry. Is there another sorry. I just thought I heard that someone else had a word to say. Okay. Thank you for participating. This meeting is now done, and everyone has a lovely day. Please hang up.