Ladies and gentlemen, please stand by. Your conference is about to begin. Welcome to the Atrium Mortgage Investment Corporation's third quarter results conference call. At 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'll be asked to press star two on your touch- tone keypad. A reminder that this conference is being recorded Thursday, November 14th, 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 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, and 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, 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 portfolio perspective. John?
Thanks, Rob. The business continued to produce strong results for shareholders over the quarter. EPS was CAD 0.26 per Q3, which is above CAD 0.25 in the prior year and consistent with Q2. Overall, Atrium has produced year-to-date earnings per share of CAD 0.79, which is down from the prior year, but when put into a historical context, our year-to-date nine-month performance is the second best reported in our company's history. We are also pacing well ahead of declared dividends of CAD 0.675 so far this year, which is based on an annual rate of CAD 0.90. Our steady results and improving credit risk profile, which we'll touch upon later, have supported a 3.3% increase in our monthly dividend beginning next month to an annualized rate of CAD 0.93 per common share.
At year-end, our mortgage portfolio reached a record CAD 926.3 million, which is up from CAD 907.8 million in Q2 and CAD 893.6 million at the beginning of the year. This is a record for Atrium. While growth is not our main focus at this time, the business continued to successfully execute its strategic plan of focusing on lower-risk sectors with disciplined underwriting. In particular, single-family loans continue to be a strong focus of the business, representing 43% of total principal advances in the quarter. Real estate market activity continued to remain slow, as both capital for investment and consumers both remain cautious given uncertain market conditions. Principal advances were CAD 58.2 million over the quarter, and repayments were CAD 42.3 million, both measures being below historical levels. The rate on the mortgage portfolio did come down from 10.93% to 10.52% during the quarter.
This was largely driven by the fact that the Bank of Canada had two 25 basis point rate decreases during the quarter, but we've also continued to focus on lower-risk profile loans as well. Even though the portfolio rate came down, the rate on our credit facility also came down. Credit facility is priced off prime and the market for short-term core loans. The weighted average rate on our credit facility came down to 6.96% over the quarter compared to 7.33% in Q2, 7.48% in the prior year. In terms of funding, we continue to employ a low-leverage balance sheet, with shareholder capital representing 54.6% of total funding sources. Credit facility currently has a limit of CAD 340 million.
We took advantage of that excess capacity to pay off our CAD 25.3 million convertible debentures on the first business day of the quarter since it matured on June 30th, which fell on a non-business day. Subsequent to quarter end, we also successfully completed an oversubscribed bought deal share offering in public markets on October 4th, including the over-allotment option exercised on October 25th. Total gross proceeds of CAD 28.8 million were used to repay credit facility. Accessing the capital markets to shore up our capital base helps solidify our funding capacity and liquidity sources, which remains important given market conditions and provides funding optionality for the business in the event that the market for convertible debentures is not optimal in the near future.
Provision of CAD 3.5 million booked this quarter reflects increased credit risk in the mortgage book, although our credit risk profile overall is showing signs of improvement.
Q3 provision has decreased quarter- over- quarter and year- over- year, and the percentage of mortgages in Stages 2 and 3 has also decreased from 17.8% at the beginning of the year to 14.8% in Q2 and is now at 14.0% in Q3. We continue to make significant progress in terms of resolving loans in default, but still making prudent provisions where necessary without sacrificing our steady returns to shareholders. Overall allowance represented 323 basis points at quarter end, which was consistent with Q2 and up from 253 basis points at the beginning of the year. Stage 1 or general reserve represented 98 basis points of the total and remains elevated due to a soft but improving macroeconomic outlook. Overall, this was another solid quarter for Atrium. We continue to maintain our high-quality portfolio despite slow market conditions by focusing on our preferred lower-risk sectors.
We continue to make progress in terms of managing credit risk through prudent provisioning, resolving loans in default, and we further solidified our balance sheet with a successful equity offering just after quarter end. This reflects the resiliency of our business model as we have been successfully navigating headwinds in the real estate market. We also believe lower interest rates and inflation will promote better market conditions going forward, albeit slowly. This will help support a modest increase in our dividends. That being said, we will continue to tread cautiously from both a financial and credit risk management perspective as we move forward. Rob, I'll pass it back to you for portfolio and business updates.
As John said, we had another strong quarter. Atrium MIC generated basic earnings per share in Q3 of CAD 0.26. For the first nine months of 2024, our earnings per share of CAD 0.79 is the second strongest result in our 12-year history as a public company. We increased our loan loss provision in Q3 by CAD 3.5 million versus CAD 4.4 million last quarter. Quarterly provisions are gradually reducing as we deal with our Stage 2 and Stage 3 loans. As you all know, we have always been proactive in making loan loss provisions, which will protect future earnings. Overall, the portfolio increased from CAD 908 million last quarter to a record CAD 926 million in Q3. Single-family and commercial sectors have been gradually increasing over the course of 2024, which is consistent with our business plan.
Atrium's average mortgage rate dropped from 10.93% last quarter to 10.52% in Q3, mostly due to two 25 basis point reductions in the prime rate of interest on July 24th and September 4th, respectively. Total of high-ratio loans, that is, loans over 75% loan- to- value, was CAD 90.1 million, equal to 9.7% of the total portfolio in Q3. This total is down CAD 5.1 million from Q2 when the balance was CAD 95.2 million. And the good news is that since the end of Q3, over 50% of that total has been repaid. In Q3, the average loan- to- value of the portfolio dropped slightly to 64.1%, which continues to be within our desired range. Atrium's percentage of first mortgages in Q3 increased to a record 97.3%. Construction loans were virtually unchanged at only 4.7% of the total mortgage portfolio.
As construction costs have recently stabilized and short-term interest rates have dropped, we're becoming more open to underwriting construction loans, although it will not be a major part of our portfolio. Shortly after the end of Q3, Atrium completed a highly successful common share offering for total gross proceeds of CAD 25 million to further support the growth and liquidity of our business. In late October, the investment dealers also exercised their option to a 15% over-allotment, totaling CAD 3.75 million, which closed on October 25th. We're gratified by the overwhelming investor demand for this offering. Turning to defaults, in Q3, the total of Stage 2 and 3 loans dropped by CAD 5 million to CAD 129.7 million. In fact, our combined Stage 2 and 3 loans have dropped over 18% from CAD 159 million just two quarters ago.
There was a lot of progress in dealing with commercial loans in default during the quarter, as you will hear. I'll briefly describe each of the loans. First is the Markham townhouse site that was once owned by StateView Homes. The CAD 1.5 million balance, which was held back by the receiver, was fully released during the quarter. The second loan is in North Vancouver and totaled CAD 51 million. We've been speaking about this loan for several quarters. This is the 4.5-acre site fully approved for multi-residential buildings with a GFA of 300,000 sq ft. The loan was repaid shortly after quarter end and resulted in a reduced loss of CAD 2.1 million. As a result, we had a net recovery of over CAD 4 million. The next loan is a condo inventory loan in Vancouver, totaling CAD 12.9 million.
This loan is secured by 12 newly completed residential units, and we also have an assignment of a CAD 10.5 million first mortgage on a parcel of land last appraised at CAD 29 million. So we estimate Atrium's overall loan- to- value at just 53% and definitely do not expect to incur a loss. Commitment letter from a non-bank lender has been received, which is scheduled to repay the loan in full. We are advised this should occur before the end of November. We have the legal right to list the condo units for sale if this refinancing falls apart. The last three loans are located in Greater Vancouver, total CAD 34.5 million, and are connected to a single sponsor. There were four loans last quarter.
One CAD 4 million loan was repaid in Q3 through the sale of the property, and another CAD 11 million loan was repaid just last night.
We're down to two loans totaling CAD 22.8 million. In Q3, we got the legal right to list the two properties for sale. We've made a lot of progress on this file and believe that we have adequate loan loss provisions in place for the final two loans. As mentioned earlier, we increased Atrium's loan loss reserve in Q3 by CAD 3.5 million versus CAD 4.4 million last quarter. Atrium's loan loss reserve totals a very healthy CAD 29.9 million, equal to 323 basis points on the overall mortgage portfolio. This is up from the 203 basis points one year ago. It's worth noting that we continue to have a large general reserve on our highest quality S tage 1 loans. We strongly believe that we have adequate provisions in place, which will protect profits for the future.
That statement is backed up by the net recoveries on the two problem loans, which were repaid this quarter. I expect an unusually large number of loan repayments in Q4, in part due to the repayment of the aforementioned loans in default. As a result, we expect that Atrium's portfolio will decline in Q4. While we would ideally like our mortgage portfolio to always grow from quarter to quarter, loan turnover in the portfolio is an indication of a healthy portfolio, especially in the depressed market conditions that we are experiencing today. My economic commentary is as follows. The economic news in Canada was uninspiring in Q3. Canada's third quarter GDP is tracking at less than 1.5%, which is below the Bank of Canada's forecast of 2.8%. The unemployment rate ended the quarter at 6.5% after hitting a seven-year high of 6.6% in August.
Thankfully, CPI in Canada dropped from 2.7% in June to just 1.6% by September. As a result, the Bank of Canada reduced its policy rate in late October by 50 basis points to 3.75%, and the consensus among economists is for another 25-50 basis point cut on December 11th. Most economists now forecast the Bank of Canada rate at 2.5% by the end of 2025. Lastly, during Q3, the federal government announced an abrupt change in immigration policy in late October. The number of permanent residents will drop from 485,000 this year to 395,000 in 2025, 380,000 in 2026, and 365,000 in 2027. Feds also intend to reduce temporary residents from 7.3% of the population to 5% by the end of 2026. This policy change could have a negative effect on both the growth of the overall economy and the real estate sectors.
By contrast, the U.S. e conomy is doing very well. The economy grew at 2.8% in Q3, and the unemployment rate is only 4.1%. Inflation has also cooled to 2.1%. The election of Donald Trump presents a more uncertain future for Canada. Increased tariffs, renegotiation of the free trade agreement, and a drop in the Canadian dollar are examples. Turning to the commercial real estate markets, it appears as though cap rates have topped out, or at least they did so in Q3. According to CBRE, momentum is starting to build in the commercial real estate investment markets, fueled mainly by a decline in bond yields. In the GTA and Vancouver, there was virtually no change to cap rates for the apartment, industrial, and office sectors. The industrial market slowed in Q3, with a national availability rate reaching a still respectable 4.4%.
In Toronto, the availability rate rose to 4.2%, and in Vancouver, it rose to 4.1%. The office market in Canada began to stabilize in Q3. Vancouver remained the tightest market in Canada, with an 11.8% vacancy rate downtown and a suburban vacancy rate of 10%. In Toronto, the downtown vacancy rate was more elevated at 18.2%, while the suburban vacancy rate was 20.7%. Fortunately, the construction pipeline in the GTA is now down to 3.1 million sq ft, representing only 1.8% of total inventory. Looking at the residential and multi-residential real estate markets, and first looking at resales, the resale market had been slow for many months. But based on the sales results in October, it may finally be showing early signs of recovery, spurred on by lower rates. In the GTA, October resales were up 14% on a monthly basis and 44% compared to the same month last year.
New listings fell by 6.8% on a monthly basis but are up 4.3% year-over-year, and the Home Price Index in the GTA was up 0.1% on a monthly basis and down 3.3% on a year-over-year basis. In Metro Vancouver, resales in October were also up 32% compared to last year. October sales were only 5.5% below the 10-year seasonal average after several months of being 20%-25% below the seasonal average. New listings were up 17% on a year-over-year basis, and the Home Price Index in Metro Vancouver was down 1.9% year-over-year and 0.6% compared to last month. Turning to new home sales, the new home market remained very slow. There were 7,700 new home sales in the GTA from January to September of this year, representing a decrease of 48% compared to 2023.
The number of high-rise and low-rise sales both declined year- over- year, with high-rise sales falling more significantly. On a month-over-month basis, the benchmark price dropped by 2.1% for low-rise and 0.6% for high-rise. In Vancouver, the Q3 figures are not yet available, but in Q2, Metro Vancouver's new multifamily home sales increased by 14% from the previous quarter but decreased 13% on a year-over-year basis. A total of 46 projects were launched in the second quarter, introducing 4,545 new units of inventory, with a respectable 38% reported as presold by quarter end. To summarize, residential resales appear to have turned the corner and should gradually improve as interest rates drop. But the new home market remains fairly weak, particularly in the GTA, and will take longer to recover. Fortunately, all levels of government appear committed to increasing affordability to assist with new home supply.
Most recently, the Feds increased the cap for CMHC-insured mortgages from CAD 1 million to CAD 1.5 million, and they extended the amortization period for new homes to 30 years. We expect more municipal and provincial incentives to come over the next year. To conclude, despite ongoing challenges in the real estate market, Atrium has continued to produce superior results for our shareholders. Our year-to-date earnings of CAD 0.79 represent the second-best nine-month result in our history. And our conservative 85% dividend payout ratio bodes well for the prospect of another sizable special dividend at year-end. We have accomplished those results while maintaining our disciplined underwriting, with 97% of the portfolio composed of first mortgages and 90% with a loan- to- value of less than 75%.
In Q3 and the early part of Q4, we made substantial progress on the repayment of several Stage 2 and Stage 3 loans, which was the culmination of several months of hard work. As a result, we expect that Stage 2 and Stage 3 loans, as a percentage of the portfolio, will drop sharply when we release our 2024 year-end results in February. Needless to say, we're comfortable with our current level of loan loss provisioning. Atrium has consistently outperformed its peers during market downturns when the benefits of our conservative underwriting are most apparent. Based on our consistently strong quarterly results over the last several years and recent improvements in our borrowing base, I am pleased to announce a 3.3% increase in our dividend from an annual rate of CAD 0.90 to CAD 0.93 per share.
That's all for our 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. First question is Sid Rajeev from Fundamental Research Corp. Sid, please go ahead.
Hi, thank you. The increase in focus on single-family and commercial mortgages, is this a long-term trend or a temporary decision to align with market conditions?
It's a more long-term plan, but it also is a lower-risk type of sector, in fact, high-ratio. So we're particularly focused on it now. Single-family is a lower-risk, lower-return sector, single-family mortgages. So there's a limit to how large we'll get on it, but we have quite a bit of room where we are now.
Yeah. So as you were saying, single-family is always one of the toughest markets, I guess, competitive. Your average lending rates decrease over time. And it is a relatively new segment for you. Which segment within single-family do you focus? Is it the higher-end detached homes, condos, or?
It's a mix of all of them. We're more concerned with liquidity, so we tend to focus on the major geographic areas, so we focus on the GTA, London, Ottawa, Cambridge, Kitchener, Waterloo, Hamilton. We don't tend to go to the smaller towns or rural areas because there's less liquidity, but our average loan would be, I think it's about CAD 600,000-CAD 700,000 or CAD 600,000-CAD 750,000, so we're not going for jumbo loans or anything like that. In fact, it's a pretty affordable mix given the cities that we're focused on.
Oh, yes, and in terms of Stage 2 and 3, they totaled CAD 130 million at the end of Q3. Are you open to giving some guidance on what this figure will be by the end of 2024?
No. But what we can tell you is at least CAD 62 million, right, John, has come off already since—and when I say come off, and repaid since the end of Q3.
Okay. So that means we are going to see a significant decrease in loan loss provisions, at least in Q4 compared to Q3.
Likely.
Yeah. No, that's good. Thank you so much.
Okay.
If anyone else has a question, please enter star two on your keypad. The next question is Graham Ryding from TD Securities. Graham, please go ahead.
Hi. Good afternoon. Maybe I could start with the repayments that you're expecting in Q4. Can you quantify that? Is that the CAD 62 million that you just referred to, or do you have visibility on repayments beyond that?
We track it to the extent we can for the entire portfolio, and it's as much as CAD 150 million. So it's a big number with a small number in Q3, and it's a big number in Q4.
Got it. Okay. But that's a gross number, right? You're obviously going to try to develop some origination to offset that in the quarter?
Yeah. My guess is it'll take a few quarters to catch back up. That's a big number for us.
Yeah. Okay. Understood. You mentioned a recovery of CAD 4 million with one of the arrears that you're able to work out or get repaid on. Are we going to expect that to be released back into earnings, or is it still somewhat fluid in terms of how you're going to treat those ACLs on your balance sheet?
We were fairly conservative this quarter, so we reallocated a lot of those net recoveries to other loans. We're feeling very comfortable with how we're provisioned. I guess that's, yeah. I mean, that's what I'll say. I mean, we ended up at 3.5—what was it? 3.5 versus 4.4. It is coming down. We only had one new loan go into Stage 2 or 3 this quarter, and it was a small loan. Hopefully, that'll be the same going forward.
Okay. But you weren't suggesting that there's a CAD 4 million recovery happening?
No. That's not possible. Yeah. And we knew those were coming before the end of the quarter, so that would have gone straight into probably Q3's results if they were firm deals that were.
Just to clarify, that's not CAD 4 million. It's CAD 400,000.
No. No. The CAD 4 million, oh, CAD 4 million of net recoveries on provision is what we had. That's what Graham's talking about. Yeah.
Okay. And.
Yeah. We reallocated it to clarify.
Yeah. Understood. Okay. And then just how about with these sort of regulatory changes around longer amortization periods for new purchases? What are you hearing from your sort of developer clients? Is this material, or is there still more that needs to play out to get activity going on that front in terms of sort of lower rates and construction costs coming down, or maybe just a color on the mood from your client base?
Yeah. It's still the latter. It's still a weak market, particularly in the GTA. I was actually impressed with the number of launches in Vancouver: 46 launches and 38% or 39% resales by the end of the quarter on those launches. Those are pretty decent numbers. In the GTA, it's a lot slower, but what's interesting is construction costs are coming down in the GTA and not coming down in Vancouver, and that's a reflection of the weaker market in the GTA, so the lower interest rates and the lower construction costs, which I've always talked about as two things we need to revive the new home market, those are starting to happen.
Hopefully, the other thing that we need, which is a stronger resale market, hopefully, October is the first sign of that because I don't think anyone was expecting October resales to be as good as they were: 32% higher in Vancouver, 44% higher in Toronto. I didn't hear anybody imagining those types of numbers. Hopefully, that's the first sign. Our view is the high-rise market in the GTA will have another tough year in 2025 and then probably start to recover.
Okay. You should be.
Economists always say, and I'm sure you've heard this a million times as well, that it takes one to two years for lower interest rates to sort of galvanize consumers to be more aggressive in their spending habits.
Right. A bit of a lag effect. Appreciate the color. That's good for me. Thank you.
Okay.
Anyone else has a question, please enter star two on your keypad. It appears that there are no other questions at this time. I will now give the call back to Mr. Robert Goodall for closing statements.
Okay. Thank you. And thanks for those attending the conference call. I hope you're pleased with the results and the increase in our dividend, which has been the first one in a while. I know we're really pleased with how the quarter went in many respects, not just the earnings, but the rather dramatic improvement in loan quality as well. For existing shareholders, thank you for your continued support. Have a good day.
Thank you all for participating. This conference call is now concluded. Please hang.