Is about to begin. Welcome to the Atrium Mortgage Investment Corporation's Q1 conference call. At this time, all lines are in a listen-only mode. Later, we'll conduct a question-and-answer session. If at that time you have a question, you'll be asked to press star followed by one on your touch-tone phone. As a reminder, this conference is being recorded Thursday, May eleventh, 2023. Certain statements will be made during this phone call that may be forward-looking statements. Although Atrium believes that such statements are based on 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 host, Mr.
Goodall, President. Please go ahead.
Thanks, thanks for calling in today. Our CFO, John Drake, will start by talking about our financial results, and then I will speak about our performance from an operational and portfolio perspective. John?
Thank you, Rob. I'm pleased to announce that Atrium continued to deliver strong financial results for shareholders in the Q1 of 2023. Our record net income of $14.2 million translated into an earnings per share of $0.33, which beat our previous public record of $0.31 in Q4 of 2022. It was also up significantly from $0.25 in the prior year. This performance was driven by maintaining a relatively high gross mortgage portfolio balance of $846 million at quarter end. This is down 2.4% quarter-over-quarter, but up almost 7% over the prior year quarter. We had $65 million of principal advances in the quarter, very similar output to Q4, but this was offset by $87 million of repayments.
The repayments did include a couple of larger ticket loans, which can skew production one way or the other. The slight contraction in the portfolio was more than compensated for by a record high weighted average interest rate on our portfolio, which was 11.04% at quarter end. This was up from 10.77% in the previous quarter end and 8.32% in the prior year quarter end. The increase in the weighted average rate was largely driven by Bank of Canada rate increases. The Bank of Canada raised its policy rate 25 bips in the Q1 and 425 bips over the past year. The increase was also due to a gradual shift in the portfolio towards variable rates.
79% of the portfolio was based on floating rates at quarter end, compared to 63% in the prior year quarter. Turning to the funding side of our business, our credit facility usage tracked slightly lower this quarter to CAD 207 million, which was in line with our portfolio movement. The rate on this facility does move with time, and our average rate was 6.72% in Q1 of 2023. This is higher than 4.5% over the course of last year and 2.92% in the prior year quarter due to higher benchmark rates driven by Bank of Canada rate increases. The facility did, however, represent only 24.2% of our funding sources at quarter end. Our other funding sources include convertible debentures, which remain locked in at favorable rates that stagger over several years.
The convertible debentures represented about 18.2% of our funding sources at quarter end, with the balance of our funding comprised largely of equity capital. Our balance sheet remained in a low leverage position at 44% at quarter end, with ample capacity in our facility to both grow the portfolio and provide liquidity should the need arise. Our overhead expenses, including our largest expense on management fees, remain in line with expectations. We did book a provision of CAD 950,000 in Q1 of 2023 to bring our total allowance to CAD 11.7 million, or 1.38% of our gross mortgage portfolio. This is up from 1.24% at year end. The increase in our UCL reserves was due to a combination of factors.
The first is a deterioration in macroeconomic indicators which ultimately drive higher provisioning for Stage one loans as we believe credit risk is heightened for all lenders in the market, including Atrium. In addition, we also had a modest increase in our Stage two reserves as well. On a net basis, Stage two loans increased to CAD 37 million from CAD 26 million over the quarter. Most of this increase, about CAD 8 million, was driven by residential mortgages that are included within the house and apartment category in our portfolio. Loans classified as Stage two have exhibited factors that indicate an increase in credit risk, and overall, they account for about 4.4% of our total portfolio at quarter end, which is up from 3% in the previous quarter. These loans are not impaired. Otherwise, they would be classified as Stage three.
As you can see in our results, we have no Stage 3 loans at quarter end. We assess all loans in Stage two individually to derive what we consider to be a conservative approach to provisioning based on potential outcomes. Overall, our portfolio continues to hold up well given the slow market conditions. Stepping back, the business produced excellent Q1 results, including a record net income of CAD 14.2 million. Despite slower real estate market conditions, our business model continues to generate strong earnings. As higher benchmark rates have increased our portfolio rate, we maintain a relatively high portfolio balance with what feels like a solid pipeline given current market conditions. We continue to remain disciplined with respect to our operating expenses, and most importantly, we maintain a very strict focus on risk management to ensure we have a resilient portfolio.
We continue to ensure the business maintains a strong balance sheet during these uncertain market conditions. We also want to ensure that we are positioned with ample capacity to grow should the right risk reward opportunities arise. Rob, I'll pass it back to you for the business update.
Thanks very much. As John said, Atrium MIC generated record basic earnings per share in Q1 at CAD 0.33, following our previous record earnings of CAD 0.31 just last quarter. The mortgage portfolio actually dropped by approximately CAD 20 million and finished at CAD 846 million. Loan advances of CAD 69 million were similar to last quarter and below normal levels, which reflects the general lack of activity in the real estate market. For the quarter, 93.5% of the new funded loans were from Ontario, 6.5% from BC. Loan repayments were surprisingly high at almost CAD 88 million, most of which were loans in Ontario. Atrium's average rate rose from 10.77% last quarter to 11.04% in Q1. This is primarily due to a 25 basis point increase in prime during the quarter.
Approximately 79% of our loans are now floating and directly benefit from the increase in the prime rate. We believe that our mortgage rate, our average mortgage rate has probably peaked and will gradually drop in future quarters as we focus on high quality new loan business. Despite the reduction in the mortgage portfolio in Q1, we are seeing lots of good opportunities and currently have over CAD 100 million in our pipeline. With the escalation in interest rates, we've been able to reduce our spread over prime and compete more effectively with banks and trust companies. For example, when prime was 2.45%, our lowest rate was still 7.5%, equivalent to prime + 5.05%.
With prime currently at 6.7%, we can price at a much finer spread over prime. This allows us to source higher quality loans, which is a particularly critical consideration at this point in the economic cycle. I expect that our loan portfolio at the end of Q2 will be larger than it is today. The loan quality of Atrium's portfolio remained high in Q1. The total of our high ratio loans, that being loans over 75% loan-to-value, was CAD 31 million, equal to 3.7% of the portfolio. Our largest loan in this category will be paid down or was paid down to 65.5% loan-to-value in April, thereby reducing Atrium's current high ratio loans to only 1.9% of the total portfolio.
Excluding this loan, the description of the high ratio loans are as follows. First, a CAD 7.4 million second mortgage with a major developer in Toronto, which was underwritten and funded about a year ago at 78.9% loan-to-value. We think that the developer bought extraordinarily well and the guarantee is very strong, we continue to have no concerns about this loan. Second, a CAD 1.5 million first mortgage in Calgary, which is in arrears, has been conditionally sold by the borrower's realtor with a closing date at the end of June. Interviews with two realtors also suggest a value well above our exposure level.
The balance of seven and a half million in high ratio loans are single-family loans, 12 in number, where our loan-to-value ranges from 75.9%-93.1%. In Q1, the average loan-to-value of the portfolio increased marginally from 59.4% last quarter to 60.8% at the end of this quarter, and continues to remain well below our target of 65%. Turning to operations, the geographic composition of the portfolio is now 72.1% in Ontario, 26.8% in BC, and 1.1% in Alberta. We remain comfortable with this geographic allocation. Atrium's percentage of first mortgages actually hit a record high of 95.5% in Q1. It was 92.5% last quarter.
Ontario and BC now each have more than 95% of their respective loan portfolios in first mortgages. The percentage of construction loans remain steady at 6.8% of the portfolio, and our average loan-to-value on construction loans was modest at 61.7%. Given the difficulty of controlling construction costs and the time frames to completion, we feel a conservative level of exposure to construction loans is appropriate at this time. Perhaps the risk metric which best exemplifies our conservative lending philosophy is that 96.3% of the portfolio was less than or equal to 75% loan-to-value, which reflects a very defensively positioned portfolio. Turning to defaults, there were three commercial loans in default, representing just 3.2% of the portfolio. The first is a pre-sold project in Sutton that we've reported on previously.
It has a $7.8 million balance. It's in first mortgage position and has been in and out of default over the last couple of years due to the excessive amount of debt subordinate to Atrium and an uncooperative and unscrupulous borrower. Atrium has an estimated loan-to-value of 64%, and we do not foresee a loss. Atrium's collateral consists of phases 2- 5, which have block plan approval for 138 building lots, as well as a 6-acre school site and a small commercial block. A private receiver was engaged at the end of 2021 in order to prevent the borrower from stalling the development process.
Subsequent to quarter end, phases two and four were registered, and proceeds of sale received in April reduced our loan all the way down to CAD 2.4 million. We expect the borrower to draw another CAD 1.1 million of our loan in Q2 and Q3 before phase three and five are registered and closed. We expect registration to occur in either Q3 or Q4, at which time this loan should be repaid in full. The second commercial loan in default is owned for eight townhouses. I referred to it earlier. It's a loan in Calgary, where we have a CAD 1.5 million exposure. The two business partners recently got into a disagreement and stopped making interest payments. We've now got the legal right to sell the project, and we were on the verge of listing it for CAD 2.4 million.
The borrower's realtor, who had already been working on selling the property, just entered into a conditional purchase and sale agreement for CAD 2.35 million. The deal is scheduled to close at the end of June. If it doesn't, our realtor will take over the process on July third and list the property for CAD 2.4 million. We don't expect a loss on this loan. The last is probably the most highly publicized, and that is the loan to Stateview. It's got a loan balance of 17.8%. Atrium holds the most senior ranking Sorry, CAD 17.8 million. Atrium holds the most senior ranking CAD 17.8 million tranche of a CAD 23.24 million first mortgage. With the balance of CAD 5.44 million ranking subordinate and held by another lender.
We've also recently learned that the borrower granted second mortgage to a private lender and a third mortgage to TD Bank. The loan is secured, rather, by a 5.3 acre development site located northwest of the intersection of McCowan Road and Fourteenth Avenue in Markham. Planning applications were initially submitted in 2021, proposing 76 traditional townhouse units. The borrower submitted revised planning applications in 2022 with the support of the city, increasing the total number of units to 84 units. Approval of this revised development plan was reported to be imminent prior to the event of default. After non-payment of an interest payment due on April 1st, we quickly engaged a litigation lawyer and issued demand letters and a notice of intent to enforce.
A court-appointed receiver was appointed on May second with the consent of Stateview. The receiver has issued an RFP to a number of prominent realtors to market the property for sale, with proposals due on May 17th. Meanwhile, Stateview had already also engaged a real estate agent to generate purchase offers, and one conditional offer was provided for a combined purchase of our site and the adjacent site. Assuming that the price would be a portion based on a unit count, which is the logical assumption, our loan, the price is valued at between CAD 25 million and CAD 27 million for our parcel, which aligns with our current underwriting and obviously would result in a full recovery. Fortunately, Atrium has no additional loan exposure to the borrower. Defaults in the single-family portfolio consisted of 14 loans totaling CAD 8.6 million.
nine of those 14 loans are actually current with their mortgage payments and are only in technical default due to realty tax arrears. Overall, we're pleased with the resiliency of the portfolio. We analyze and risk rate each loan every quarter to stay close on any emerging risks. We increased Atrium's loan loss provisions in Q1 by CAD 952,000 to reflect the increased risk in real estate markets overall. The loan loss reserve is now equal to 138 basis points on the total portfolio, up from 124 basis points last quarter. The loan loss reserve continues to have no Stage three allocation, meaning no impaired loans. Turning to foreclosures, we continue to have two foreclosed properties, a four-plex in Leduc, and the second is a 90-unit rental project in Regina.
The Leduc balance is unchanged at CAD 1.1 million. We believe that the CAD 1.1 million carrying cost for Leduc is appropriate as it is consistently 100% leased and generates between a 4% and a 4.5% yield. The Regina project was also 100% leased throughout the quarter and we're passing through rent increases as leases are expiring. The carrying cost of the Regina apartment is CAD 13.2 million, which we believe is also representative of current value. The change in market conditions has been very positive over the last 12 months. We recently raised our rental rates by an average of 4.1%, and we are meeting no resistance from tenants. The 2022 CMHC market survey for Regina was released in early 2023 and confirmed that there was no dramatic improvement...
Sorry, that there was a dramatic improvement in market conditions. It reported an overall vacancy rate in Regina of 3.2%, down from 7.1% last year and 7.5% in 2020. My economic commentary is as follows: The economic news in the Q1 was stronger than expected. However, real GDP growth weakened each month. It was up 0.6% in January, 0.1% in February, and the preliminary estimate for March is a decline of 0.1% on an annualized basis. Growth in Q1 is estimated at 2.5%, but virtually all of that increase came in January. April looks to fall due to the federal worker strike. RBC is still forecasting a mild GDP decline in Q2 and Q3.
During the quarter, inflation kept dropping, ending the quarter at 4.3%, which compares to 6.3% at the end of last quarter. Much of the easing was explained by lower energy prices, which were lower than a year ago. The Bank of Canada's core inflation measures averaged 3.6% on an annualized basis over the last three months. The Bank of Canada expects inflation to drop to 3% by the middle of this year and 2% by the end of 2024. If such an improvement were to occur, we could expect short-term rates to start dropping possibly towards the end of the year, and certainly by the beginning of 2024.
Turning to the commercial markets, according to CBRE, cap rates on commercial real estate rose by an average of 49 basis points in 2022, and a further 10 basis points to 6.1% in the Q1. Investors are mostly targeting high-quality assets while liquidity for Class D assets weakens. Industrial buildings and apartments remain steady. They are the two favorite sectors in the market, with low vacancy rates and rental growth. Vancouver has cap rates in the industrial sector averaging 4.25%, while multifamily cap rates are in the 3% range. In Toronto, industrial cap rates were also in the 4.25% range, while apartment cap rates are slightly higher than Vancouver at 3.5%.
Not surprisingly, the largest increase in cap rates was in the office sector, ranging from 4.5%-5.75% for Class A downtown assets in Vancouver and Toronto. Cap rates are higher in both cities for suburban office assets. The national office vacancy rate reached a shocking 17.7% in Q1. Thankfully, Atrium has very limited exposure to the office sector, as we've always believed it's a sector best suited for very well-capitalized borrowers, including REITs and institutional investors, who can absorb the ups and downs of the market. Looking at the residential resale market, the news for resales in April was positive for both the GTA and Metro Vancouver. Resales in the GTA were 9.2% higher than March. April 2023 sales were only 5.2% below April 2022 sales.
Sorry, April 23 sales were only 5.2% below April 22 sales when the market was very active. The number of listings increased by 1.6% on a month-over-month basis, is still 38% lower on a year-over-year basis. The benchmark price was up 2.4% last month. It's down 12.1% year-over-year, That's an improvement from 14.2% decline at the end of last quarter. In Metro Vancouver, there were 2,741 resales in April, which was 16.5% below last year. The housing market was peaking at that time, These sales results do represent an improvement in the market conditions. New listings were 4.2% below last year and 21% below the 10-year average.
As a result, the benchmark price increased by 2.3% month-over-month, and it's actually increased by 5% since the beginning of the year. Benchmark prices are now only 7.4% below last year. Turning to new home sales, the sales of new homes remained weak across the country. CMHC is forecasting that home building could drop by 19% in 2023. Due to a lack of new launches, new high-rise sales in the GTA for Q1 dropped 77% from the peak of the market last year. Low-rise sales also declined 63% from last year. The benchmark price for high-rise and low-rise product has fallen 10.8% and 2.1% respectively on a year-over-year basis.
The supply of unsold high-rise inventory is still reasonable at 14,500 units, of which 56 units are in the presale stage, so they may never get built. Of the 110,000 units currently under construction, 93% are presold and there are only 406 high-rise units of standing inventory. Similarly, the inventory of unsold low-rise homes was modest at 1,592 units. In Vancouver, new home sales are gradually improving. In Q4, sales were 33% higher than the previous quarter. On an annual basis, Metro Vancouver's sales were just 7% below the 10-year average.
Signs of a market rebound were most prominent in the South of Fraser region, as Q4 sales were up 89% from the previous quarter. Only 6% of all concrete condominium units scheduled to be complete by the end of 2023 remain unsold. Standing inventory of completed move-in ready units at the end of Q4 was 970 units. It's not surprising that the resale market is improving faster than the new home market. The price gap between resales and new home prices had grown to a point where many investor buyers were not as keen to purchase pre-construction units. I think we will need further price appreciation in the resale market before we begin to see a sustained recovery in the new home market.
The key to a housing and commercial real estate recovery is a reduction in inflation and interest rates. Fortunately, 5 and 10-year bond yields have reduced to 3.07% and 2.9% respectively, which suggests that the bond market believes that inflation will continue to drop. I do believe that pricing growth in the resale markets in the GTA and Vancouver will accelerate once the cost of debt declines for the following three reasons. Number one, the structural housing shortage in both cities cannot be remedied anytime soon. Number two, immigration's at a record level, the federal government intends to increase the immigration target to 500,000 people annually by 2025. Number three, the apartment and condominium rental markets just seem to continue to be exceptionally strong and keep increasing rents.
To summarize, Q1 was another very good quarter for Atrium. The arrears level is still low, with only three commercial loans in arrears. The portfolio is showing resiliency in the face of weak market conditions. Our foreclosed assets are actually performing at their best levels ever. I expect they will continue to perform well notwithstanding soft economic conditions. We have been informed by realtors that demand for multi-residential assets in the Prairies is quickly increasing. We will look at selling these assets sometime over the next year or so. The balance of 2023 will be challenging for the real estate industry as a whole. Today's high interest rates will continue to put pressure on real estate values and strain borrowers' abilities to service their debt.
In my opinion, a drop in inflation, and particularly in short-term interest rates, is by far the most important change needed to improve the real estate market. Until investors and developers feel assured that interest rates are beginning to decline, many will choose or be forced to stay on the sidelines. We are actively managing our existing portfolio to identify weaknesses early and deal with them expeditiously. The Safety Loan is a good example. The reason that our single loan to this borrower was publicized in the newspaper was because we took legal action before many of the other lenders. With five managing directors having more than 18 years of lending experience and three of us with more than 30 years of experience, we have the necessary experience to deal with economic slowdowns. The good news is we're also seeing an increase in high-quality lending opportunities.
I suspect that our loan portfolio will be higher at the end of Q2 than it is today. Thank you. We'd be pleased to take any questions from the listeners.
Thank you. Ladies and gentlemen, we'll now conduct the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, your first question comes from Rasika Tulasiram from TD Securities. Please go ahead.
Afternoon. Thank you. If I could start on Stateview. I appreciate the comments you gave in your prepared remarks. Just a couple of questions here. To confirm, these are all development plans, so no construction has started against these mortgages?
Yeah, that's right. It's a townhouse site, with I guess up to 84 townhouse units.
Okay. Are these already in your Stage two loans?
Yeah. It's in the Stage two loan. Yeah.
Okay. Awesome. If I could switch gears to your construction portfolio. I think you mentioned 6.8%. Are you able to share what sort of construction assets these are? Are these like mainly multi-family properties or any other asset class here?
I don't have it off the top of my head, but I think it's mostly multi-family, condominium. I think it's a, it's a variety, but it would be primarily those two.
Okay. Understood. Just my last question on the mortgage rate. Absent any unexpected interest rate hikes by the Bank of Canada this year, would you say your mortgage rate has peaked around these levels? Is there actually even a potential for it to come down modestly as you target higher quality borrowers?
Yeah, I do think regardless... Like, I'm not expecting prime to come down until, you know, the very beginning of 2024 or the very end of 2023. I think our rates have peaked and will come down slightly. The reason is that if... Think about a situation where a loan is 18-month-old, 18 months old, it was priced when prime was at 2.4% or 5% and say it was pricedA prime + 5. As I mentioned to you, that was sort of our minimum rate when prime was that low. It was like an overall 7.5% rate. Well, that same loan is now over 11%. It's mispriced. You have a choice of losing that loan. It'll probably get prepaid.
You may never see that client again, that developer client again. You can adjust the pricing when you feel it's appropriate, and then retain that client for goodwill purposes. One of our peers has already shown a drop in their average mortgage rate in this quarter. We didn't, but we expect that it could be slightly down. It's not gonna be drastically, but it could be slightly down in the remaining quarters of 2023.
Okay. Makes sense. As an extension, sorry, if I could just sneak in one more question. Your mix of floating rate mortgages, I believe you're 79% now, and back in 2021, I think you were low 60s, if I remember. Do you see this mix changing towards the end of the year? The reason I ask this because if all the forecasts about rate cuts in 2024 come out to be true, would you look to reposition your portfolio more towards a fixed balance?
A borrower would generally prefer a fixed rate just because it creates certainty. They're not gonna be thrilled about a fixed rate today because they know that interest rates are very likely to come down in the next six months or eight months or whatever. We're still doing floating rates, 'cause they see the potential of that rate coming down. The negotiation becomes what's the floor? Okay. You know, up until this quarter, the floor was the current prime rate plus our spread. We could only go up, we couldn't go down. Now it gets harder and harder as it becomes clearer and clearer when inflation is coming down, that rates are gonna drop.
In some of our more recent loans, the floor might be slightly below where the prime plus spread of the loan is today.
Okay. That's clear.
Do you understand what I'm saying?
Yeah. Yeah, I do. Yeah. There's a bit more downside on the risk now that it's lower because there's more visibility on interest rates coming back. Yeah.
Yeah, that's right.
Okay, awesome. Thank you for your time.
Okay.
Ladies and gentlemen, as a reminder, should you wish to ask a question, please press star followed by one. Okay, there are no further questions at this time. I'll turn it back to Mr. Goodall for closing remarks.
Okay. Thanks very much for calling in. I hope you're pleased with our results. It's our, I think that's our Q3 in a row of record earnings. We're very pleased with them and pleased with the way the portfolio has held up, continuing to hold up in the face of soft market conditions. Appreciate those of you who are shareholders supporting us, and have a good day. Thanks very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.