Ladies and gentlemen, please stand by. Your conference is about to begin. Welcome to the Atrium Mortgage Investment Corporation's First Quarter Conference Call. This time, all lines are in listen-only mode. Later in the call, 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 keypad. A reminder that this conference is being recorded Wednesday, May 15th, 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 obligations 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. Mr. Goodall, please go ahead.
Thank you, and thank you 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 a portfolio perspective. John?
Thanks, Rob. So Atrium got off to a solid start in fiscal 2024 by posting an EPS of CAD 0.27, which is pacing ahead of our fixed dividend rate, CAD 0.225 for the quarter. This is consistent with our Q4 performance, but down from CAD 0.33 in the prior year quarter. Our Q1 revenues of CAD 25.2 million are actually up 6.3% over the prior year due to our higher portfolio balance and a higher portfolio rate, but EPS is down due to a higher provision for mortgage losses booked in the current quarter and not a deterioration in core operating performance. Overall, our mortgage portfolio ended the quarter at CAD 886 million, which is down slightly from 894 in Q4, but higher than the prior year balance of 845.
Market activity remained slow in the quarter. Uncertain economic conditions marked by high interest rates, inflationary construction costs, and financial stress on end consumers continued to keep capital on the sidelines and hence cap the number of attractive opportunities in the market. Benchmark rates remained unchanged during the quarter, but our portfolio rate came down to 11.25% from 11.42 at the beginning of the year. This decrease is due to loan repayments at higher rates being replaced with originations at lower rates. All things being equal, we expect this trend to continue. This trend is also consistent with our focus on lower-risk reward mortgages. Nearly 30% of new originations in Q1 were single-family mortgages in the GTA. This aligns with our primary objective of maintaining a resilient portfolio and and protecting shareholder capital during uncertain times.
Our balance sheet also remained very strong at quarter end. Our total balance sheet leverage of 43.9% remained low, and our floating rate credit facility represented just 24.7% of total funding sources at the end of the quarter. We still have plenty of room on our credit facility, as it currently has a limit of CAD 350 million. So this represents both a source of liquidity and potential funding capacity to grow the business should market conditions permit. The balance of our funding is mainly comprised of equity capital and our convertible debentures, which remain fixed at favorable rates, with the earliest one due this June 2024, and the rest staggered between 2025 to 2029. Given the high-rate environment, management would prefer to lock in longer-term funding at more favorable rates.
Therefore, we continue to monitor the market closely, but we have ample capacity on our credit facility to fund the upcoming maturity, if required. During the quarter, we also booked a provision for mortgage losses of CAD 3.9 million, which is significantly higher than the previous amount of CAD 1 million in the prior quarter, and this is due to a higher assessment of credit risk in our mortgage portfolio. Total allowance of mortgage losses is now 281 bps, up from 253 bps last quarter. It should be noted that a large proportion of our allowance is for Stage 1 of performing loans. Our Stage 1 allowance component represents 93.9% of our total allowance and remains elevated due to weak macroeconomic indicators employed in our model, including housing prices, unemployment, and economic growth.
On a positive note, outside of smaller single-family loans, no new multifamily or commercial loans were classified as Stage 2 or 3 this quarter, and the total amount of loans in stages two or three was down 14% quarter-over-quarter, mainly due to paydowns. While Atrium is not immune to current market, credit risk profile improved slightly over the quarter. In addition, our business model continues to produce strong cash flow for investors, in spite of proactively recognizing higher credit risks through our provisions. Overall, Q1 was another consistent quarter in terms of financial performance for shareholders, continued to adhere to our established risk appetite in terms of new risk opportunities, and been very disciplined with respect to operating expenses, continued to maintain a strong balance sheet that can withstand any stresses from the downturn in the cycle. Rob, I'll pass it back to you.
Thank you. As John said, we had another good quarter. Atrium MIC generated basic earnings per share of CAD 0.27 in Q1. We again increased our loan loss provision to CAD 3.85 million for the quarter, despite. As John mentioned, a material reduction in Stage 3 loans during the quarter. As you know, we've always been proactive in making loan loss provisions, which will protect future earnings. Overall, the portfolio decreased marginally from CAD 893 million in Q4 to CAD 886 million in Q1. Loan advances were CAD 78 million, and loan repayments were CAD 81.6 million. We expect to have a high level of loan repayments in Q2, and consequently, we expect that the loan portfolio will reduce in size. Atrium's average mortgage rate dropped slightly from 11.42% last quarter to 11.25% this quarter.
This was due to the fact that a significant portion of new loans were low-risk, single-family mortgages priced at 9.49% per annum. Approximately 80% of our loans are now floating, down from 89% last quarter. Given that 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 low at 8.9% of the total portfolio. There are four high-ratio loans in the commercial and multi-residential portfolio, totaling CAD 68 million, and there are also CAD 10.5 million of high-ratio single-family loans, with loan-to-values ranging from 75.3%-92.2%. Atrium's percentage of first mortgages jumped from 94.6% to 96.7% in Q1, which I believe is an all-time record high.
Construction loans represent only 4.85% of the mortgage portfolio. We view construction loans as the most risky type of loan today because of frequent cost overruns and significant time delays. In Q1, the average loan-to-value of the portfolio increased to 64%, which continues to be within our desired range. Turning to defaults, there were no new commercial or multi-residential defaults during Q1. I'll describe each of the loans. A presold project in Sutton of CAD 2.8 million. This loan was actually repaid shortly after quarter end on April 11th. A Markham townhouse site of CAD 1.5 million. This project had a much larger loan. It's actually been sold and closed, and the final CAD 1.5 million should be released in the next three months. CAD 49 million mortgage in North Vancouver.
This 4.5-acre site has been in default for several quarters, and it is fully approved for a mix of multi-residential buildings, having a gross floor area of approximately 300,000 sq ft. Since the last quarter, the redemption period for the borrower has lapsed, and we interviewed three realtors. We selected CBRE, who launched the sales process in the first week of May. There is some strong interest in the property, and we'll know more by the end of next quarter. The remaining four loans are located in Greater Vancouver and total CAD 38.5 million, and they are connected to a single sponsor. As a result of ongoing legal proceedings, I'm unable to speak in too much detail about these loans, but I'll tell you what I can.
The loans range in size from CAD 3.8 million to CAD 13.5 million, and all of them are secured by low-rise development sites, they're mostly townhouse sites, in Langley, Richmond, and White Rock. One is a construction loan, and the other three are bridge loans. We believe that we have a potential impairment on two of the four properties, and accordingly, we've made specific provisions for those two loans over the last six months. The final loan in default is a condo inventory loan in Vancouver. The loan was secured by 22 completed condominium units with an estimated liquidation value of about CAD 25 million. The loan balance dropped from CAD 20.5 million last quarter to CAD 16.2 million at the end of Q1 as a result of five condo inventory units being sold.
Another four have gone firm and will close within the next couple of weeks, reducing the loan by a further CAD 3 million. In addition to the condo inventory security we hold, we also have an assignment of a CAD 10.5 million first mortgage on a parcel of land appraised at CAD 29 million. So we definitely do not expect to incur a loss on this loan. In Q1, we increased Atrium's loan loss reserve by CAD 3.85 million. The amount of the quarterly loan loss reserves continues to gradually trend downwards, and this for the third straight quarter. Atrium's loan loss reserve now totals a very healthy CAD 24.9 million, equal to 281 basis points on the overall mortgage portfolio.
This is up from 253 basis points last quarter, 203 basis points in Q3, and 150 basis points in Q2. It's worth noting that we have a large general reserve equal to 107 basis points against our highest quality Stage 1 loans, which should reinforce the notion that our loan provisioning is very conservative. As a result, we strongly believe that we have adequate provisions in place which will protect profits for the future. My economic commentary is as follows: After strong GDP growth in January, GDP increased by only 0.2% in February, which was well below consensus. The forecast for Q1 as a whole is 2.5% GDP growth and a seventh consecutive quarterly per capita decline.
Canadian labor market has been soft, with the unemployment rate increasing by 1.1% since 2022 to a total of 6.1% today. Canada's labor market contrasts with the U.S., where employment levels have been very strong and the unemployment rate is only 3.9%. The Consumer Price Index in Canada dropped to 2.9% in March, from 3.4% in December 2023. Once again, shelter costs contributed to most of the gain. Core inflation is sitting slightly above 3%, but it is also adversely affected by the inclusion of mortgage and rent increases. There's a growing sense that the Bank of Canada will begin cutting interest rates at the June or July Bank of Canada meeting.
Consensus among economists is for a cumulative 1% cut by the Bank of Canada by the end of 2024. Inversely, the higher inflation rate and stronger job market in the U.S. has caused economists to now forecast only one interest rate cut towards the end of 2024. Divergence in economic prosperity between the U.S. and Canada could limit how much the Bank of Canada can cut rates. Turning to the commercial real estate markets, the pace of cap rate increases slowed significantly in Q1, with the yield rising just 9 basis points on a quarter-over-quarter basis to 6.69%.
In the GTA, multifamily cap rates and high-rise apartments were 3.35%-4.4%, while industrial cap rates were 5%-5.5%, and office cap rates were 5.25%-7.25%. In Vancouver, where cap rates are traditionally lower, multifamily cap rates in high-rise apartments were 2.25%-3.25%, while industrial rates were 4.5%-5%, and the office cap rates were 5.25%-6.25%. The industrial vacancy rate in Toronto rose to 3.3%, while Vancouver rose to 3.6%. Significant growth in industrial lease rates appears to have come to an end.
Vancouver remained the tightest office market in Canada, with a 10.9% vacancy rate downtown and a suburban vacancy rate of only 7.8%. In Toronto, the downtown vacancy rate was much more elevated at 18%, while the suburban office vacancy rate was 20.6%. Looking at the residential resale market, in the GTA, April sales were down 5% compared to last year, when there was a temporary resurgence in market activity. The number of new listings were up a surprising 47% over the same period. The home price index in the GTA was down less than 1% year-over-year, and on a month-over-month basis, the composite index was up 0.4%, and the average selling price was up 1.5%. In Metro Vancouver, resales in April were 3.3% above the previous year.
Similar to the GTA, the number of residential properties listed for sale jumped by 42%. The home price index increased by 2.3% on a year-over-year basis and was up 0.8% compared to last month. Turning to the new home market, in the GTA, sales in Q1 were 10.9% below the same period last year. High-rise sales were down 41% on a year-over-year basis, while low-rise sales were up 76% on a year-over-year basis, albeit from a low base of comparison. The benchmark price for high rise and low rise dropped by 5.6% and 11.4%, respectively, on a year-over-year basis, but they did increase by 0.7% from the previous month.
Although the supply of unsold high-rise inventory increased, 57% of that inventory is still in the presale stage and may never be built. As importantly, there are only 525 unsold units of standing inventory, and 87% of all units currently under construction have been presold. In Vancouver, the Q1 figures are not yet available, but in Q4, Metro Vancouver's new multifamily home sales increased by 20% from the previous quarter and 58% above the same quarter last year. The higher sales were facilitated by a greater number of projects being released to the market. A total of 40 projects were launched in the fourth quarter, representing over 5,400 units of inventory, of which 38% were reported sold at the end of the year. To summarize, resale sales volumes are below average levels, and prices are relatively flat.
Not surprisingly, the new home market remains relatively weak, particularly in the GTA. We need lower mortgage rates and price appreciation in the resale market before we will see a significant recovery in the new home market. To finish, despite continued challenging market conditions, we're off to a good start in 2024, with earnings per share of CAD 0.27. Overall, I'm pleased with the way the portfolio performed in Q1. The Stage 3 loans dropped from CAD 36.7 million all the way down to CAD 18.8 million, and our combined Stage 2 and Stage 3 loans dropped by approximately CAD 22 million. We had no new commercial and multi-residential defaults during the quarter. Given the state of the market, I believe that there will be fewer active non-bank lenders in the future and that lenders like Atrium will benefit from the fallout.
This process is taking longer than I anticipated, but I still expect that it will ultimately unfold. For now, we're finding new loan business quite competitive in terms of both loan amount and pricing. That competition is coming from both non-bank lenders and occasionally from large banks. For the balance of 2024, we're targeting a higher proportion of originations in the single-family sector, as well as higher origination in commercial sectors. This strategy is aimed at lowering risk, the risk of any new loan business put on the books. My sense is that the real estate markets will be soft until at least the end of 2024. We forecast that a market recovery should gradually occur in 2025, when the real estate markets have bottomed, inflation has declined, and the Bank of Canada has materially dropped interest rates.
In the interim, the lack of activity is starting to result in a drop in construction costs. The most pronounced drop has been in low-rise construction, where we've seen as much as a 15% drop in costs. I remain confident that our team can manage our portfolio through the balance of this downturn. As we discussed earlier today in our management presentation at the AGM, we have consistently outperformed during market downturns. During the financial crisis, for instance, in 2008 and 2009, Atrium earned CAD 0.98 a share and CAD 0.99 a share. And since the beginning of COVID, we've earned CAD 90, CAD 0.98 a share in 2021, CAD 1.08 in 2022, and a record CAD 1.18 per share last year.
We started the year again, 2024, with strong earnings of CAD 0.27 per share. That's all for the presentation, but we'd be pleased to take any questions from the listeners.
The Q&A session will now begin. Please enter star two on your keypad to let the operator know you have a question. The first question is from Sid Rajeev from Fundamental Research Corp. Sid, please go ahead.
Hi, gentlemen. Congrats on your strong quarter. I'm trying to figure out how you, you would might be forecasting allowances. Currently, it's at 2.81% of the portfolio. If there are no mortgage-specific expected losses, will you maintain this allowance at current levels, or is it safe to assume that you'll keep increasing, similar to what you did in Q1?
So Sid, I'll jump in on this one. So, you know, our allowance, as Rob mentioned, you know, we have our Stage 1, which is general, which is over 100 basis points, which we feel is adequate at this time. And given the softness in the market, that's probably gonna persist and continue. You know, I would expect that number to stay at an elevated level for the foreseeable quarters. You know, the Stage 2 and 3, it's very, you know, it's very hard to give a very precise answer to you because they're very loan-specific, right? So, you know, every quarter, we're gonna look at our portfolio, look at our borrowers, look at our specific situations.
You know, Rob talked about specific loans where, you know, the collateral is coming to market, so that's gonna help us understand our provisions a little more closely. So, it's hard to give you precise numbers on this one, but, you know, you know, we could say as long as the market remains soft, there's gonna be pressure to keep higher level provisions.
Okay, thanks. The second question is, obviously, rates are expected to drop in the second half or at least by Q4, and you did mention that you could see a gradual increase in new mortgages. How about your risk appetite? Would you be open to getting more of, you know, lowering your first mortgages or, you know, more geographical diversification or things like that? Any material changes in risk appetite?
Yeah, I don't think our risk appetite will change. However, we are looking at a second mortgage that has on a property. It's a bunch—it's an industrial portfolio with a ton of cash flow coming out of it. We view it as a really good opportunity. I don't know if we can put it together. We're just starting to talk to an institutional partner, but that would, you know, that would push up the percentage of second mortgages, but it's not like we've decided to change our risk profile. It's just a really good opportunity that's come along. And I don't know if we'll do it or not. We'll see.
Okay. Thank you so much.
The next question is Graham Ryding from TD Securities. Graham, please go ahead.
Hi, good afternoon. Let me just start with the mortgage rate. So it's sounds like you're increasing your mix of single family, and that's putting some lower rate mortgages into the portfolio. So reasonable to assume that that weighted average mortgage rate should be trending down as we sort of move through 2024?
... I think so. The other thing is, when prime went up, some of the, you know, some of the mortgages that were already on the books had some really high yields. And when we renew those mortgages, particularly, we want to keep those mortgages, you know, we may price a little finer. So I think it'll gradually come down. I don't think it'll come down sharply, but I think it'll gradually come down.
Okay. So listening to your commentary, I appreciate the color that you gave on the, on the Stage 2 and Stage 3. I got the sense that it's the CAD 38.5 million, 4 loans, 1 sponsor in GVA, is the area that might have the most sort of risk from your perspective. You're—you think you may have to take some impairments there. Is that accurate? When you go through all the Stage 2 and Stage 3, that's the most problematic group of mortgage loans.
Yeah, I think you're right, but I think we're really well provisioned on them. I don't think we're gonna need more provisions on them. I think there's a chance that we could recover on them. I mean, we're seeing, you know, verbal interest and in one case, a written offer that would suggest we're over-provisioned. But offers don't always close these days. So even, you know, we're not counting on that offer unless it goes firm. So I think you're right that the CAD 38 million single sponsor, the 4 loans. Like, two of the loans we're not terribly worried about, and two of the loans we are, but we're pretty darn well provisioned on both of them. Like, I, I, I...
It's not like we need to catch up on the provisioning on either one of those.
Okay, understood. Normally, you have pretty low loan-to-values against your, your mortgages, so why—what happened here that two of them, you, you think you may take some losses here?
So, one of them was a construction loan, where the construction costs got completely out of hand. You know, we have the suspicion that the cost monitor didn't do a good job of ensuring that the funds we were advancing were actually advanced to this project and not to another project, because the costs don't make any sense, in terms of the cost to complete. So it put us in a much higher loan-to-value than we should have been. It was not just the fact that, you know, construction costs, our costs have increased. There's something more than that on this loan. Having said that, we're over 60% provisioned on that loan, so we don't have much exposure on it. Like, we're taking the worst case scenario on that loan.
And the other one was project where the city changed its mind. The municipality, it's in the GVA, but I'm not gonna say which municipality, but the city changed its mind as to how they saw a particular area, and we were lending on the basis of what we understood the density would be. And that. Again, I won't get into really too granular, but there was a big surprise in terms of what the zoning looks like today versus what we've expected it to look like. And it was because the city completely reversed its position, in part because of provincial guidelines that came, that the city was not keen on, but had to adhere to. I don't know if I'm making any sense, but.
No, no, no, no.
So, you know, sometimes you hit the perfect storm. These two were the perfect storm.
Yeah. No, that makes sense to me. And then if that—if we sort of look into 2025, and we do get a scenario where rates start to come down and the commercial market seems to start be a little bit healthier and more active, and you do see a decline in your Stage 2 and Stage 3 loans, like, assuming no material write-offs, would you be in a position there to reverse some of these ACLs that you've built up on your balance sheet and reverse them back into earnings?
Yeah, we could be. I mean, you know, in 2019, we thought that a 1%, J ust as, just, from 10,000 feet, we thought a 1% loan loss provision on the overall portfolio was perfectly fine. Now, we're at 2.81, and we've hardly incurred any losses, and we've got CAD 24.9 million in provisions in place, so we think we're really well provisioned. But ultimately, when the market... And we even have, as John said, 107 basis points against our healthiest loans, our Stage 1 loans. So we think we're really well provisioned. So, you know, the question is, you know, I think we're in a U recovery. I don't think we're in a V recovery.
I think, a lot of real estate developers are weaker than they were, obviously, two years ago. They've been servicing mortgages often out of their own liquidity. And so I think the recovery will take a while. I do think we're at or near the bottom. But it's not like they're suddenly gonna be healthy at the end of all this. If they've lost a lot of their liquidity, you know, they're not gonna be going and buying new projects, the minute that the clouds part. They just won't have the same financial capacity they once did. So we're just being pretty careful, because my sense is that, yeah, the recovery should start sometime in 2025, hopefully early 2025, but I don't think it's gonna be a miraculous and quick recovery.
I think it's gonna be a gradual one.
Okay. Very helpful. One more, if I could get greedy, just the convertible debenture that's coming up in June. It sounds like you would more likely paying this off with your credit facility than coming back to the market. Is that fair?
I think so. I think almost definitely, yes. We're hopeful that converts will come down. They're down about 75 basis points in terms of the pricing that's been presented to us by various investment dealers, including some from your firm. So, you know, I think the market is probably 7.25-ish, maybe 7, and we wouldn't want to pay that much because convertible debentures are expensive. They come with significant broker fees, so the real cost is 0.75 of a point more or something like that. So we look as interest rates drop for some improvement in the convertible debenture market, and then I think we'd be open to access it. I don't think we'd want our entire balance sheet to just be equity and line of credit.
We'd like to have converts on our within our balance sheet, just because they're fixed rate obligations, they're very predictable. I think it's healthy to have a mix of all three sources on your liability side of your balance sheet, equity, line of credit, and converts.
Okay, great. That's it for me. Thank you.
Thanks, Graham.
If anyone else has a question, please dial star two on your keypad. 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 very much for listening to our presentation. We're not cocky about it, but we're quite proud of our results over the last several years. We've now had the highest earnings per share of what we view as our peers for 12 straight quarters. And we think we're very well provisioned, so we haven't created those earnings per share through skimping on loan loss provisions. To the contrary, we're very healthily provisioned. So as I say, we're not cocky about it, but we're quite proud of our results, and hopefully the listeners who are shareholders are pleased as well. Thank you very much.
Thank you for participating. This conference call is now concluded. Please hang up.