Good morning, ladies and gentlemen, and welcome to the Atrium Mortgage Investment Corporation second quarter results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a Q&A session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, August 4th, 2023. I would now like to turn the conference over to Rob Goodall, CEO. Please go ahead, sir.
Thank you, and thank you for calling in today on Friday morning before a long weekend. We actually have a lot of people on the line, which is nice to see. Our Chief Financial Officer, 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 reported very strong financial results for the second quarter. Our net income of CAD 14.4 million was a quarterly record and is up 35% year-over-year. Our earnings per share of CAD 0.33 matched our public company records posted this past first quarter and is up 32% from the CAD 0.25 posted in the prior-year quarter. These financial results were driven by a slight contraction in the mortgage portfolio over the quarter, being more than offset by a higher rate on the portfolio and steady operating expense levels. Market conditions continued to remain slow in the quarter, resulting in CAD 62.6 million of principal advances, which were more than offset by CAD 86.6 million of repayments, both metrics being very similar to what we experienced in Q1.
That being said, we have seen a lot of good quality deals start to queue up in the later part of the quarter, many other lenders stay on the sidelines. The portfolio rate of 11.27% at quarter end is also a record. This is up from 11.44% last quarter and 10.77% from the beginning of the year. The quarterly increase was driven mainly by the 25 basis point rate increase in the overnight rate instituted by the Bank of Canada on June 7. The percentage of the portfolio priced off lending rates has also continued to increase. It was 84.6% at quarter end, which is up from 75.4% at the beginning of the year.
While these factors ultimately drive our higher portfolio rate, one factor nudging in the other direction is the fact that our new originations on our multifamily loans in particular, are on average, coming in below our average portfolio rate. This is by design as the business continues to focus on higher quality, low-risk deals, given market uncertainties and less competition in the market. Our funding profile remained stable at quarter end, with plenty of capacity on our credit facility. The average rate on our credit facility was 6.96% during the quarter, relative to 6.72% last quarter, due to the prime rate increase from the Bank of Canada instituted on June seventh. The facility was down CAD 28.4 million over the quarter to CAD 178.5 million, which is consistent with our portfolio movement.
This balance represented just 21.5% of total funding sources. Our other funding sources are not based off lending rates and include our capital base of CAD 489 million and convertible debentures of CAD 157 million, which continue to be locked in at favorable, favorable rates, with maturities which stagger over the next few years. Our balance sheet leverage position is 31.2% and has remained very low, implying, implying lots of capacity for growth and liquidity. Our allowance for mortgage losses increased this quarter by CAD 0.6 million to CAD 12.3 million, which represented 1.50% of the mortgage portfolio. It's up from 1.38% in the previous quarter. We had no Stage 3 or 4 impaired loans at quarter end, so our reserve is entirely for Stage 1 and Stage 2 loans.
During the quarter, loans in Stage 2 increased from CAD 37.3 million to CAD 77.1 million, or from 4.4% of the portfolio to 9.4% of the mortgage portfolio. This increase was really driven by one larger loan in the Vancouver area that went into payment arrears. The collateral securing this loan is in a very desirable location, and we believe that we are well secured. Reserves on our Stage 2 loans are determined on a loan-by-loan basis. Our Stage 1 reserves are developed using our expected credit loss model, and increases in the quarter were driven by key macroeconomic factors, including GDP growth, unemployment, and home prices, which are all expected to weaken. The prolonged economic slowdown increases the probability of defaults and losses as borrowers run the risk of depleting funds.
Management continues to believe that the company continues to operate in a higher-risk environment, given the impact of higher rates and inflation, as well as a lack of liquidity in the market. Overall, we are very pleased with our second quarter financial results, which managed to top our record Q1 earnings. Our Q2 EPS of CAD 0.33 is the highest of our public peer group for the past nine quarters now. Earnings per share for the first six months of the year of CAD 0.66 are pacing well ahead of the CAD 0.50 posted in the first six months of the prior year as well. Higher benchmark rates, successfully maintaining a high portfolio balance, containing our operating expenses, inclusive of loan loss provisions, all support record earnings posted in 2023 thus far.
Despite our strong earnings performance to date, we recognize that we are operating in an environment, in an environment with elevated credit risks due to economic uncertainties and a sluggish real estate market, so our focus continues to remain primarily on risk management. That being said, we remain cautiously optimistic about our growth prospects for the balance of the year. Rob, I'll pass it back to you.
Thanks, John. We enjoyed another very successful quarter. As John said, Atrium matched last quarter's record earnings of CAD 0.33 a share. Our six-month earnings of 66% per share is 32% ahead of last year's record result. To my surprise, our average mortgage rate did increase by 23 basis points to another record in Q2, mostly due to the 0.25% change in the prime rate of interest on June 7th. The short duration of our loans has allowed us to pivot quickly to floating rates. Approximately 85% of our loans are now floating and directly benefited from the increase in the prime rate of interest. Atrium's average mortgage rate rose to 11.27% from 11.04% last quarter, despite the fact that we reduced spreads on some of our highest-quality loans at renewal.
Overall, the portfolio reduced from CAD 846 million in Q1 to CAD 825 million this quarter. New loans of CAD 63 million were similar to the volume of new business in Q1. Although the pipeline was robust throughout the quarter, several new loan opportunities failed to close, and others took longer than expected to fund. Meanwhile, loan repayments of CAD 87 million were higher than we anticipated. This level of repayments is quite surprising and is reflective of the quality of our portfolio. For the quarter, 83% of the new funded loans were from Ontario and 17% from BC. We're seeing a lot of good opportunities, and the loan portfolio is CAD 25 million higher today than it was at quarter end. With the escalation of interest rates, we've been able to reduce our spread over prime and compete more effectively with banks and trust companies.
This allows us to source higher-quality loans, which is particularly critical at this point in the economic cycle. Despite the overall weakness in the real estate market, the portfolio is holding up reasonably well. The CAD 1.5 million Calgary loan, which had been in default for a long time, was repaid in full in Q2, and both the CAD 18.5 million first mortgage to Stateview and the CAD 2.5 million loan in Sutton look like they will close before year-end. The only blemish on the portfolio, therefore, is a large first mortgage in North Van, which went into default on June 1st. We do expect a full recovery on this loan, but the legal process in BC is slower than Ontario, so it will likely take nine-12 months to realize on our securities.
The portfolio strength is further exemplified by the low amount of high-ratio loans. That is, loans greater than 75% loan-to-value, which was only CAD 17 million in Q2, down from CAD 31 million last quarter. As a percentage of the portfolio, high-ratio loans account for now only 2.1% of the portfolio, down from 3.7% last quarter. There's only one high-ratio commercial loan, commercial and multi-residential loan, which has a 78.9% loan-to-value. This is a second mortgage to a major developer, and we've always viewed this loan as having a low-risk profile. The balance of the high-ratio loans are single-family mortgages, which total CAD 9.6 million. The loan-to-value on these single-family mortgages range from 75.9% to a high of 91%.
Lastly, in Q2, the average loan-to-value of the portfolio decreased marginally from 60.8% last quarter to 59.8% this quarter and continues to be well below our target of 65%. Turning to our operations, the geographic composition of the portfolio is now 75.4% in Ontario, 23.7% in BC, and 0.9% in Alberta. We are comfortable with this geographic allocation. Atrium's percentage of first mortgages hit a record high of 96.2%, up from 92.5% at the end of 2022. Ontario and BC each had more than 95% of their respective loan portfolios in first mortgages. We're currently underwriting a couple of second mortgage opportunities, so Atrium's first mortgage percentage will likely dip slightly in Q3.
The percentage of construction loans remained low at 7.25% of the total portfolio. Our average loan-to-value on construction loans was a modest 62%. Given the difficulty of controlling construction costs and timeframes to completion, we feel a conservative level of exposure to construction loans continues to be appropriate at this time. Turning to defaults, there were three commercial loans in default, representing 8.1% of the portfolio. The first is the pre-sold project in Sutton. This loan was substantially paid down during the quarter from $7.8 million down to $2.2 million. Phases one, two, and four have all closed of this five-phase project. Atrium's remaining collateral consists of phases three and five, as well as a six-acre school site and a small commercial block.
Atrium's loan-to-value is only 40.8%, excluding letters of credit, and 80.4% if those letters of credit were fully cash collateralized. We do not foresee a loss. Site servicing of the last two phases will be complete by the end of Q3, and registration is anticipated to occur before the end of Q4, at which time this loan will be repaid in full. The second commercial loan in default is the Stateview loan of $18.5 million. Atrium holds the most senior-ranking tranche of a $24 million first mortgage, with a $5.5 million subordinate tranche held by another lender. The loan is secured by a 5.3 acre redevelopment site located northwest of the intersection of McCowan Road and 14th Avenue in Markham.
Planning applications were submitted for 84 townhouse units, and city approval was reported to be imminent prior to the event of default. After non-paying payment of interest due on April 1, we quickly engaged a litigation lawyer, and the courts appointed a receiver on May 2. Atrium and the receiver interviewed four prominent realtors, and Cushman & Wakefield was hired. The property was listed for sale, and we will be evaluating purchase offers over the next few weeks. We expect this loan will be repaid by year-end. The last and third commercial loan in default is a CAD 46 million first mortgage. The loan went into default on June 1. It's a 4.5 acre site with some revenue from existing improvements.
The site is fully approved by city council for a mix of multi-residential buildings, having a gross floor area of approximately 300,000 sq ft. The property was recently appraised by a well-known and respected appraisal firm for CAD 83 million, implying a loan-to-value of 55.4%. Although we view the appraised value as possibly optimistic in today's market, we do not believe Atrium will suffer any loss. Defaults in the single-family mortgage portfolio total CAD 8.1 million, which is down CAD 500,000 from last quarter. Several of these loans are only in technical default due to realty tax arrears. Overall, we're pleased with the performance of the portfolio. We analyze and risk rate each loan every quarter to stay close to any emerging risks. The overall portfolio risk rating changed little from Q1 to Q2.
Turning to loan loss provisions, we increased Atrium's loan loss provision, as we have since the beginning of COVID. We increased it in Q2 by CAD 690,000 to reflect the increased risk of real estate markets overall. The loan loss reserve is now equal, as John said, to 150 basis points on the overall portfolio, which is up from 138 basis points last quarter. In fact, we have doubled our loan loss reserve since the beginning of the pandemic, when it was 74 basis points. The loan loss reserve continues to have no Stage 3 allocations, 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 carrying cost of these assets is CAD 14.3 million.
The Leduc four-plex is carried at CAD 1.1 million. The property is consistently 100% leased and generates between 4% and 4.5% yield. The Regina apartment has a carrying cost of CAD 13.2 million and is under contract to sell. In fact, the purchaser has waived all conditions, and closing is anticipated to occur before the end of Q3. We estimate that the net proceeds will be approximately equal to our, our carrying value after adjustments in closing costs. My economic commentary is as follows: Stats Can estimates GDP growth slowed to 1% in Q2 after a much stronger GDP growth of 3.4% in Q1. The growth slowed as the second quarter progressed, with the early forecast for June at -0.2%.
The Bank of Canada is now forecasting GDP growth of 1.8% for the year as a whole. However, the second half of 2023 is expected to be much slower than the first half. The job market remains strong, with unemployment increasing by 60,000 jobs in June, but the unemployment rate actually ticked up to 5.4% from 5.2% in May because of record-setting population and labor force growth. Fortunately, inflation kept dropping over the quarter to 2.8% in July, versus 4.3% last quarter and 8.1% at its peak. It's the first time in two years that the inflation rate is in line with the Bank of Canada's target of 1%-3% inflation.
Much of the easing was explained by lower energy prices, which were 22% lower than a year ago. The consensus among economists is that the Bank of Canada will not increase its overnight rate of about 5% at its next meeting on September 6. The Bank of Canada does expect inflation to remain around 3% for the next 12 months before declining to its 2% target by the middle of 2025. Unfortunately, that forecast means that interest rates are likely to stay high for a longer period of time, probably until the end of Q1 or Q2 of 2024. Turning to commercial markets, real estate markets, cap rates continued their ascent and rose another 25 basis points in Q2. The national average all properties cap rate is now 6.28%.
Industrial cap rates have risen 90 basis points over the last year, while apartments have increased just 25 basis points. Both markets remain very strong. The industrial market in Vancouver and the GTA have availability rates of just 2.4% and 1.4%, respectively. In a sign that the industrial sector may have peaked, net absorption in Q2 was down significantly in both cities versus the prior quarter. The office market, as most of you know, continued to be very weak across Canada, with an average vacancy rate of 18.1% in Q2. Vancouver has the lowest vacancy rate in Canada at 9%, and the GTA has a 17.9% vacancy rate. Atrium continues to have very limited exposure to the office sector.
Looking at the residential resale market, in the GTA, resales in June were 16.5% above last year, but 7% below last month. The number of new listings and active listings were down 3% and 12% respectively on a year-over-year basis. The average selling price was up 3.2%, and the benchmark price is now down, as of June, was down only 1.9% on a year-over-year basis, and that compares to 12.1% last quarter, so there's been a huge shift. Similarly, in Metro Vancouver, resales in June were up 21% from last year, but 12% below last month. Total listings increased 7.5% from last month, but they're still 8% below last year and 17% below the 10-year average.
As a result, Vancouver's June benchmark price increased by 1.3 month-over-month, and is now only 2.4% below last year at this time. Again, it's down 2.4% year-over-year. Last quarter, it was down 7.4% year-over-year. Big improvement in the resale market on both. Then in the last 2 days, both the GTA and the Vancouver Real Estate Board announced July's resales results, and the benchmark price rose a further 0.6% in Vancouver and 1.1% in the GTA. In both cities, sales were up year-over-year again, but again, fell on a month-over-month basis and are still below the 10-year average. Listings in both cities finally rose, which may result in increased sales in future months.
Turning to the new home market, despite a spike in sales in June, it's been a slow first half of 2023 in the GTA. New home sales decreased by 42% when compared to the same period in 2022, and the average price of high-rise sales and low-rise sales saw year-over-year declines of 8.4% and 6.9%, % respectively. Fortunately, the amount of inventory in the GTA on the market remains low. The supply of unsold high-rise inventory in the GTA decreased slightly in Q2 to 14,500 units, of which 61% are only in the presale stage and won't get built unless they each achieve the 70%-75% presales threshold necessary for construction financing.
Further, there are only 401 units standing inventory, and 92% of all units under construction in the GTA have been presold. In Vancouver, the Q2 figures are not yet available, but the trend in Q1 was higher sales than the previous quarter, but still well below the five-year average. In Q1, the level of unsold inventory also increased. To summarize, the resale markets are improving faster than the new home market in both the GTA and GVA. Price gap between resales and new home prices needs to continue to narrow. More specifically, we will need further price appreciation in the resale market and reduced interest rates before we see a significant recovery in the new home market, or at least that's my opinion.
To finish, Q2 was another strong quarter for Atrium, both from an earnings and portfolio perspective, and our pipeline of new loans suggests that Atrium's mortgage portfolio should increase in Q3, although forecasting is difficult because of the short duration of our loans. Positive developments in Q2 included progress made in valuing and listing the Stateview Townhouse site for sale, being substantially paid down on the second loan from CAD 7.8 million to CAD 2.2 million, being paid out in full on a problem loan in Alberta, and firming up the conditional sale of the Regina apartment building at a price approximately equal to our costs. We expect that the balance of 2023 will be challenging for the real estate industry as a whole. A drop in short-term interest rates is probably the most important change needed to improve the real estate market.
In the meantime, we're actively managing our existing portfolio to identify weaknesses early and deal with them expeditiously. With five managing directors having more than 18 years of lending experience and three of us with more than 30 years of experience, we do have the necessary experience to deal with economic slowdowns. Thank you. We'd be pleased to take any questions from the listeners.
Thank you. Ladies and gentlemen, we will now conduct the Q&A session. If you have a question, please press star followed by the one on your customer phone. You will hear a tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. Once again, to ask a question, please press star one at this time. The first in the queue comes from a Steve from TD Securities. Your line is open, please proceed.
Thank you. Morning, guys. If I could just start on the credit side. So, good, good update to hear on Stateview. I guess, out of curiosity, given that there's a receiver in place, why would Stateview not be classified as a Stage 3 loan versus a Stage 2 loan?
A Stage 3 loan is only if a loan is impaired. I mean, it's too early for us to know, but based on appraisals and feedback from four different realtors who we and the receiver interviewed, it appears as though there'll be no impairment of the asset, of the loan.
Let's see if I can, I can add some more color, too. We, we, we would classify a loan in Stage 3 once we have objective evidence of an impairment, right? That's a standard IFRS, and that's what we follow. You know, just like any loan, we, we collect information, we make our best estimates based on what we have. As we move through this process, we'll get more information and, you know, and, and, you know, and classify accordingly. That's how we look at it.
Okay, that's fair. Just as an extension to that question, your Stage 2 loans at CAD 77 million right now, they are higher than, I think, over the last two, three years, at the least. What's your comfort level or outlook here for any of these loans moving to Stage 3? Or how confident are you that these would resolve without going into impairment?
I mean, it's a bit misleading because 70% of Stage 2 is one loan. Actually, the portfolio quality actually improved during Q2. We feel pretty good about the portfolio. Unfortunately, you know, a large loan did go into arrears. It appears as though at 55% loan-to-value, that we're okay, but it skewed the numbers.
Okay. Yep, yep, that's fair. Just the last question on the trade side. Would you be able to share your outlook on provision for the balance of the year, given where interest rates are and where the real estate market is, I guess, would you be looking to keep on increasing allowances over the near term?
Well, that's what we've been doing. Like, the overlay of the, of the overall market, in our view, as long as interest rates stay high, the, the market risk stays elevated. That's why we've been adding to the loan loss reserve, not because of specific loans where we see impairment. Depending on how the rest of the year unfolds, you know, we'll continue, probably increasing the loan loss reserve. I can't see it coming down. But we sort of have to play it by ear. Would you say, John?
Yeah, I agree.
Not by ear. We have to play it by facts.
Yeah, yeah. It's like asking that question. It's like asking us to, you know, predict economic activities in the future, so it's very difficult. We make the assessment every single quarter looking at key macroeconomic variables. We pay close attention to what the big banks are doing, their models, and how that impacts our specific borrower base. It's certainly been our perspective over the last few quarters, when you take this all in, that there is heightened credit risk, and we have moved up, as you can see in our numbers, but we, we make that formal assessment every, every quarter.
You know, unfortunately, we started early. As I mentioned, in my speech, we've gone from 74 basis points at the beginning of the pandemic to 150. We, we kept adding to it, but, but we can't say for sure we'll be adding to it, and certainly can't say what the quantum is, because we have to see what the evidence is at the end of next quarter.
Yeah. Yep, that's fair. If I could just sneak in one last question. On your weighted average mortgage rate, I understood that, like, 86% of your portfolio is floating right now, but on the other end, clients would be facing increasing pressure with higher rates and everything. You mentioned that you've reduced spreads on some of your higher quality borrowers. I guess balancing all of that together with the another rate hike that happened in July, would you expect your mortgage rate to maybe, I don't know, have peaked at this low? Or is there a little more room here to move higher or even come lower at, if you're retaining higher, even more higher quality borrowers?
I, I showed how bad I am at predicting last quarter, when I thought the rates wouldn't move up, and they did. In fact, they went up 23 basis points when prime went up 25, which I never would've guessed would've been that close to, to the prime rate increase, especially as 15%-16% of our book is fixed, so it wouldn't have gone up. I, I was, I was surprised by the numbers. I think the fact that the rates went up 0.25 point in early July, can't, can't remember exactly what date it was, but in July, like, I'd be surprised if our rates don't move up a snick in Q3. Maybe some renewals will have lower spreads. John's nodding his head, so he, he agrees.
Some renewals will have lower spreads, but the new business, and the existing business on the books will increase.
Yeah. I mean, in, in Q2, what was interesting is that, you'll see in our disclosures, our housing department category there in particular, there was a lot of repricing upward in those loans because we originated a lot of single-family loans in the first half of 2022. These are one-year loans, you know, and, you know, those, those reprice in the quarter. That actually drove up, drove it up higher, I think, than, than what we expected. Like, we were 23 bps, prime went up 25. If you exclude that impact, we probably would not have been probably 5 or 6 bps.
Yeah, that's a good point.
Yeah.
Some of those, some of those single-family loans went from, what? 6.99% to-
Nine.
Nine something.
Yeah.
Yeah.
That was a little bit of a factor, I believe, behind the scenes that kind of pushed it up, but.
I think the safe thing to assume would be, the very safe thing to assume would be the rates stay the same, but I, but I think it'll actually move up a little bit.
Yeah.
Yeah. Okay, yeah, that's it. Yeah, thank you very much, John.
Okay.
Once again, as a reminder, if you have a question, please press star one. There are no further questions in the queue at this time. I'll turn the call back over to Rob Goodall for any closing remarks.
Okay, thanks for all attending this morning on the Friday before a long weekend. We actually have almost a record level of attendance today, that's good to see. I hope you're pleased with the results. We think we're doing really well in a difficult environment and navigating it as well. We, we've managed to do that in 2008, 2009, where we didn't lose any money at all during that difficult time. This is a little more protracted, we're trying to be as careful as we can, and we're, as mentioned before, we've been, we've been moving up our loan loss provisions in anticipation that we could have losses at some point in the future. We feel pretty good about the portfolio right now. Thanks again.
I appreciate you, attending on a Friday morning of a long weekend.
Thank you, ladies and gentlemen. This concludes your teleconference. Please disconnect your lines.