Good afternoon, ladies and gentlemen, and welcome to the Atrium Mortgage Investment Corporation third quarter results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer 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 November fifteenth, two thousand and twenty-three. I would now like to turn the conference over to Mr. Robert Goodall. Thank you. Please go ahead.
Thank you, and thanks for calling in today. Our CFO, John Ahmad, will start by talking about our financial results, and then I'll speak about our performance from an operational and portfolio perspective. John?
Thank you, Rob. Atrium posted an earnings per share of CAD 0.25 in Q3, which is down slightly from the prior year quarter of CAD 0.27. This represents a solid performance outcome, given the current market conditions facing our industry. The Q3 earnings exceeded the dividends declared for the quarter of CAD 0.225, and more importantly, our year-to-date EPS of CAD 0.91 is on a record pace and well ahead of the CAD 0.77 posted last year at this time. Our earnings for the quarter were driven by a record-high mortgage portfolio balance of CAD 876 million, which is up CAD 51 million over the quarter, and a record level of revenues, driven by a high portfolio rate of 11.49% at quarter end.
Offsetting a portion of the strong operating margin generated by our portfolio was a provision for mortgage losses to recognize increased credit risk in our portfolio, and we'll touch on that in more detail shortly. Despite slower real estate market conditions, the business managed to originate CAD 150 million of mortgage principal, which is almost double from last quarter. This was offset by CAD 64 million of repayments, which have slowed down from an average of around CAD 87 million experienced in the first two quarters of the year. The portfolio rate of 11.49% at quarter end is a record for the company and is up from 11.27% over Q2, due to a 25 basis points rate increase by the Bank of Canada on July 12, 2023.
89.3% of our portfolio is priced off floating rates, and this percentage has increased steadily from 75.4% at the beginning of the year. The balance of our portfolio that is not floating is mainly comprised of single-family mortgages with terms of 12 months, so they too reprice, reprice quickly and help drive our portfolio rate higher over the quarters. Assuming no rate changes from the Bank of Canada, we could expect our portfolio rate to come down slightly as we continue to focus on sourcing high quality, low-lower risk mortgages at this time. Our funding profile continues to remain strong at quarter end.
Borrowings under the credit facility were CAD 208 million at quarter end and benefited from a pay down of CAD 13 million due to the sale of our investment property in Regina, Saskatchewan, for a small gain over book value. This helps to create more funding capacity and acquire more accretive assets. In addition, on August 28th, we successfully extended our credit facility with favorable terms, which is a testament to our consistent business performance over time. We extended the maturity date of the facility by almost 2 years out to July 2025. We refreshed our accordion to set CAD 60 million, such that we can increase the facility from CAD 350 million to CAD 375 million. We improved our leverage ratios, and we had no change in pricing.
At quarter end, our floating rate credit facility represented just 24% of our funding stack, and our convertible debentures of CAD 157 million continue to be locked in at favorable rates, with maturity staggering over the next several years. Overall, this continues to be a very low-leverage business, as total debt is just 33.1% of our total balance sheet at quarter end. The allowance for mortgage losses was increased to 203 basis points at quarter end from 150 basis points at the end of Q2. Elevated interest rates, inflationary construction costs, and a slowing economic growth profile has had a significant impact on all real estate markets and for all market participants. We've seen some of that risk manifest in our portfolio, which we watch very closely on a loan-by-loan basis.
During the quarter, the provision was taken mainly against Stage 2 and Stage 3 loans. Stage 2 loans, which are loans that exhibit higher credit risk than normal, have increased from CAD 77 million to CAD 109 million at quarter end. This was due to an increase in defaults, but also include loans where there is no default. The borrower is making their scheduled payments, but we have conservatively assessed higher risks due to a potential deterioration in collateral value. In terms of Stage 3, or impaired loans, we have now classified CAD 23 million loans into the Stage 3 category for the first time this year, due to the outcome of our assessment of specific borrower default situations. We assess each loan in Stage 2 and Stage 3 individually for potential losses, and the provision this quarter was driven largely by the assessment for these loans.
Our Stage 1 reserves on performing loans remain elevated at 1.48% as well, given weak forward-looking macroeconomic data indicators. Despite challenging market conditions, we believe our business can continue to deliver solid results for shareholders, and Q3 is no exception. We are on a record pace earnings-wise on a year-to-date basis, despite headwinds in the real estate markets. Our balance sheet remains strong, with plenty of capacity for growth and liquidity should the need arise, and we continue to operate a low leverage and lean business model in terms of operating expenses.... Our focus has always emphasized risk management before growth, but our business also remains agile with respect to market opportunities should they arise. Rob, I'll pass it over to you for portfolio and general business updates.
Thank you. John said we had another very profitable quarter. Atrium's basic earnings of CAD 0.25 a share were only slightly below last year's third quarter earnings of CAD 0.27 a share, which at the time, was a record for Atrium. More importantly, our nine month earnings of CAD 0.91 a share are 18% of last year's record results. And in fact, our nine month earnings per share are close to what we would normally earn in a full year. In Q3, we decided to increase our loan loss provision to CAD 5.4 million for the quarter. As you know, we've always been proactive in making loan loss provisions. This decision is consistent with the actions of most financial institutions over the last 90 days as well.
Indeed, the major Schedule A banks have doubled and tripled their loan loss provisions in the last quarter. The mortgage portfolio increased from CAD 825 million to CAD 876 million quarter-over-quarter. We had an exceptionally strong quarter of origination, particularly from the Ontario office. Atrium now has almost 77% of its portfolio located in Ontario, with the balance in Western Canada. Due to reduced activity in real estate markets across Canada, I suspect that Atrium's loan portfolio will drop to some extent in Q4, despite our rates being more competitive than ever with institutional lenders. With the rise in industry rates, we've been able to reduce our spread over prime and compete more effectively with banks, credit unions, and trust companies. This allows us to source higher-quality loans, which is critical at this point in the economic cycle.
Atrium's total of high-ratio loans, that is, loans over 75% loan-to-value, remain very low at CAD 36 million, which is equal to just 4% of the total portfolio. Atrium's percent of first mortgages remained high at 95.4%, and construction loans represent just 7% of the total mortgage portfolio. I view construction loans as one of the most risky types of loans today because of rampant cost overruns and time delays. In Q3, the average loan-to-value of the portfolio was steady at 61% and continues to remain well below our target of 65%. Turning to defaults, we have a few commercial and multi-residential loans in default in the portfolio, and I'll speak briefly about each of them. The first is a pre-sold project in Sutton, Ontario. The last two phases of this low-rise development are scheduled to be registered in November.
This CAD 2.3 million loan is forecasted to be repaid in full before the end of the year. The second loan is CAD 19.1 million with StateView Homes. Atrium holds the most senior-ranking tranche of a CAD 24 million first mortgage, with CAD 5.5 million subordinate tranche held by another lender behind us. The loan is secured by a 5.3-acre zoned townhouse site located in Markham. The first purchaser failed to waive conditions, and we're working to finalize an agreement with a second bidder. The third loan is in North Vancouver. It's a CAD 47.1 million first mortgage, secured by a 4.5-acre site that's fully approved for a mix of multi-residential buildings, both rental and condominium, and having a gross floor area of approximately 300,000 sq ft.
The property was appraised earlier in the year by a respected appraisal firm for CAD 83 million, implying a loan-to-value of 56.7%. We view the appraisal as aggressive in today's market, but the court gave the borrower until mid-March 2024 to repay the loan. We anticipate having the legal right to hire a realtor and sell the project by the end of April 2024, if the loan is not paid off by the borrower before that time. The remaining four loans are located in Greater Vancouver and only recently went into default, in fact, in November 1st. The loans total CAD 34 million, and they're connected to a single sponsor. As a result of ongoing legal proceedings, I'm unable to speak in much detail about the loans, but I'll tell you what I can.
The loans range in size from CAD 3.6 million to CAD 12.7 million and are secured by low-rise development sites, mostly townhouse sites in Langley, Richmond, and White Rock, all suburbs of Vancouver. One is a construction loan, and the other three are bridge loans. We are still gathering information at this early stage. Defaults in the single-family mortgage portfolio total CAD 9.9 million, up just slightly from last quarter. These loans have loan-to-values ranging from 56%- 87%. As such, we don't think there's much of any loss exposure on the single-family mortgage portfolio. In order to address the weakness in the overall real estate markets and the new defaults in BC, Atrium increased its loan loss reserve in Q3 by CAD 5.44 million.
Atrium's loan loss reserve is now a very healthy CAD 17.8 million, which is equal to 203 basis points on the overall mortgage portfolio, up from 150 basis points last quarter and 138 basis points in Q1. Looking ahead, we see the market remaining weak for the next few quarters, and we will proactively increase our loan loss provision as needed, which will protect future earnings.... We forecast that a market recovery should gradually begin by the middle of 2024, when real estate markets have bottomed, inflation has declined, and the Bank of Canada has begun to drop interest rates. Turning to our investment properties, at the beginning of Q3, we had two foreclosed properties, a 90-unit rental project in Regina and a fourplex in Leduc, which is a suburb of Edmonton.
The sale of the Regina apartment closed in Q3 for CAD 13.5 million. Our carrying cost was CAD 13.2 million, and the net proceeds of sale resulted in a small profit. The only remaining foreclosed asset is a fourplex in Leduc, which is carried at CAD 1.1 million. That property is consistently 100% leased and generates between a 4%-4.5% yield. My economic commentary is as follows: GDP dropped dramatically from the first quarter. GDP fell 0.2% in Q2 and is forecasted dropping 0.1% in Q3. The Bank of Canada is also now forecasting GDP growth of less than 1% for the next 3-4 quarters. Canada's anemic economic performance contrasts with the United States, who posted 4.9% GDP growth in Q3.
The U.S. consumer is less leveraged, and consequently, high interest rates are having less impact. The Canadian unemployment rate increased from 5.4% to 5.7% during the quarter, which is consistent with the lack of GDP growth. The unemployment rate has increased 4 times in the last six months. Inflation rose from 2.8% in the spring to 4% in August because of rising energy prices and mortgage costs. But inflation did drop to 3.8% in September, and inflationary pressures appear to be abating. Excluding food and energy, CPI in September rose only 3.2% on a year-over-year basis, and core measures of inflation also slowed to 3.4%. The Bank of Canada is now forecasting inflation at 3.5% in 2024, and 2% by mid-2025.
The Bank of Canada has left its policy rate unchanged since July and appears to be softening its stance on interest rates, despite complaining about political intervention. The current consensus is that the Bank of Canada will start easing rates at the end of Q2, 2024. Turning to the real estate markets, and first, the commercial real estate markets, cap rates continued to gradually increase in Q3 across all markets and sectors. The national average cap rate rose 17 basis points quarter-over-quarter to 6.45%. Not surprisingly, the office sector had the largest increase in cap rates, while more favored sectors like industrial, retail, and multifamily, had very small cap rate increases. Indeed, CBRE reported that rental rate growth in the multifamily sector has entirely offset higher cap rates.
The Canadian industrial vacancy rate rose by 40 basis points in Q3 to 2.5% from an all-time low. In Atrium's core markets, the industrial vacancy rate in Toronto rose to 1.9%, while Vancouver rose to 3%. There's a general feeling that the growth in industrial rates is back or near an end, and that absorption will continue to slow down. The Canadian office vacancy rate remained high at 18.2%. Vancouver remained the tightest office market in Canada, with an 11.8% vacancy rate downtown and 7.2% in the suburbs. In Toronto, where Atrium has very limited office exposure, the downtown vacancy rate was more elevated at 15.8%, while the suburban vacancy rate was 20.6%.
Looking at the residential resale market, in the GTA, there were 4,600 resales in October, which was down 5.8% compared to the previous year. On a month-over-month basis, sales were also down. New listings edged lower on a month-over-month basis, but were 38% above the record-low listings of a year ago. The home price index was up 1.4% on a year-over-year basis, but down 1.7% on a month-over-month basis. In Metro Vancouver, there were 2,000 resales in October, which was up 3.7% from a year ago, but remained below the 10-year average for October. The number of newly listed residential properties in Metro Vancouver increased by 15% on a year-over-year basis. Turning to the new home market, the sales of new homes remained weak across most of the country.
In the GTA, there have been 15,000 new home sales year to date, representing a decrease of 30% when compared with the same period in 2022. High-rise sales were down 43%, while low-rise sales actually increased 34%. On a month-over-month basis, new home sales in September 2023 were 3 times stronger than last year. Unsold inventory in September was up from last year, but remains at a very reasonable level. The benchmark price for high-rise and low-rise product dropped by 10.5% and 15.5% on a year-over-year basis, partly due to a change in the mix of sales toward much more affordable product. The supply of unsold high-rise inventory increased on a quarterly basis from 13,900 units to 16,400 units. However-...
64% of that inventory is in the presale stage and may never be built. There are only 515 unsold units of standing inventory in the GTA, and 92% of all units currently under construction have been presold. In Vancouver, the Q3 figures are not yet available, but in Q2, Metro Vancouver's new multifamily home sales represented a 66% increase compared to Q1, and are similar to the five-year second quarter average of sales. Standing inventory of completed move-in-ready units at the end of Q2 was 1,010 units, an increase of 4% from the previous quarter. 87% of concrete condominium units released for sale and scheduled to complete on or before 2028 have been presold.
Our view is that a material recovery in the new home market will only begin once construction costs have dropped, inflation has declined, and the Bank of Canada has signaled a drop in interest rates. So to finish, Q3 was another good quarter for Atrium. We generated earnings per share of CAD 0.91 on a year-to-date basis, which would normally be close to our earnings per share for a full year. We're on track for the largest special dividend in our history. In addition, we were able to sell our Regina apartment building at a price slightly above our book value, thereby reducing our investment properties to a carrying cost of only CAD 1.1 million.
Although the number of defaults in our portfolio increased in the latest quarter, we have dealt with those defaults by providing for an outsized loan loss provision of CAD 5.4 million. It's worth noting that we were able to expense this large provision and still generate solid quarterly earnings of CAD 0.25 a share, a figure which is well above the dividend for the quarter. Today's high interest rates have actually increased our interest margin, as opposed to most financial institutions who are facing reduced interest rate margins. My sense is that real estate markets will be soft for another 3-4 quarters, and that GDP growth will be negligible. The good news is that inflation will almost certainly fall during this period, and construction starts will plummet, which should lead to a material drop in construction costs.
In fact, construction costs have already started to drop because trades no longer have a backlog of work. The most pronounced drop has been in low-rise construction, but early trades for mid-rise and high-rise construction have also begun searching for new contracts. I remain confident that our team can manage our portfolio through this cycle. We've been actively managing our existing portfolio to identify weaknesses early and deal with them expeditiously. We have sold subordinate tranches of some higher-risk loans over the last six months in order to de-risk the portfolio. We've also increased our proportion of first mortgages and kept the portfolio loan-to-value ratios well below our long-term target of 65%. That's it for our comments. Thank you, and we'd be pleased to take any questions from the listeners.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging request. Questions will be taken in the order received, and should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift your handset before pressing any keys. One moment please for your first question. Your first question comes from the line of Gaurav Mathur from Laurentian Bank. Please go ahead.
Thank you, and good afternoon, everyone. You know, just looking at the Stage 2 loan increases, this quarter, you know, one can't help but notice that it's coming from the high-rise, mid-rise, and the housing and apartment segment. As you look at the next 12-18 months, do you perhaps see, you know, one segment fare worse than the others?
Well, those segments you mentioned represent 90% of our portfolio, so it's not surprising that they would be coming from those segments. But, you know, our view is resales are probably gonna be the steadiest, because they're smaller in loan amount, much more trading. You know, I was surprised to see the low-rise sales in new homes actually go up. It was probably from a low base the year before because the general feeling is that affordable product is selling okay, but more expensive product is where our sales are really slow right now.
You sort of think of low-rise, not so much townhouses, the townhouses are sort of the most affordable part of the low-rise sector, but detached and semi-detached, you would think would be pretty slow right now. Similarly, for condominiums, mid-rise and high-rise, the expensive condominiums are the ones that are selling slowest. And if you look at the launches that have been successful this year, they're almost all affordable. In fact, I saw something this morning from a client that said the average was something like CAD 1,175 a foot, was the average of the most successful launches this year, and that would be well below the average price of a launch in the GTA.
... Okay, great. And then, you know, just switching gears here onto your prepared remarks on construction financing, do you foresee, you know, some sort of a pullback as far as construction lending is concerned, given the volatility in the commercial real estate sector?
Well, it may be getting better now. If you're in the midst of a construction loan, it's tough.
Mm-hmm.
But as I mentioned in my remarks, there is evidence that trades are much more reasonable in their pricing. They don't have the huge backlog of work that they once had, where they were just pricing at whatever they wanted, and developers needed to go forward with their projects, so they have to accept those prices. Now, because of, you know, much fewer launches, and because of failed launches, particularly smaller players, I think trades for good quality developers who they know will succeed and get through their presales, I think they're getting really good quotes right now, particularly in low rise, but it'll happen in high rise as well. You know, high rise just takes longer to build.
So in my remarks, I said that you're seeing price drops in the early trades, like, forming because they're the ones that are finishing up right now and don't have the big backlog. The finishing trades in high-rise and mid-rise just probably still have two or three years of good times ahead of them. So a lot of developers aren't fixing those costs right now. They'll worry about those costs later on. Because they know they're coming down.
Okay, great. Well, thank you for the color. I'll turn it back to the operator.
Okay.
Thank you. Once again, that is star and one to ask your question. And your next question comes from the line of Rasib Bhanji from TD. Please go ahead.
Good afternoon. Thanks for the question. Rob, if I could start with the defaults, StateView. I think your commentary last quarter was that it should be paid off by the end of the year, but I understand you're working with a new buyer here. Is that same timeline reasonable, or should we expect it to be a bit more drawn out than?
Yeah, no, they, they wasted, unfortunately, 16 days of our time. So, we're close to signing a deal with a second bidder. There are quite a few bidders, actually, but we've identified one, and we're going back and forth, finishing an agreement of purchase and sale with a second bidder. And that one would close before the end of Q1, but not in Q4. But by the time we present to you, if they go forward, I think we'd know whether they're firm or not.
Okay, understood. Then I had a few, I guess, reconciliation questions on the defaults. CAD 22.7 million of Stage 2 , Stage 3 loans, are those part of the four loans in Greater Vancouver that just recently went into default?
Part of it is, and part of it, are our other loans.
Okay.
It's a mix of Stage 2 and three. I would say more of them are in Stage 2 right now. Majority.
Gotcha. Understood. And on the PCLs, I appreciate you took a large provision this quarter. I was going over your allowances schedule. I don't think you've actually taken off any write-offs this year. One, just wanted to confirm that that's correct. And second, do you expect to take losses whether or write-offs, write-offs, whether it be principal or accrued interest on any of these loans?
So we haven't taken a long write-off in a long, long, long time, many years. We've been building this up. I mean, You know, the definition of Stage 3 , and I'll let John correct me if I'm wrong, is there's concern about impairment. So yeah, we think that there'll be some impairment, not overly significant. And if you look at our seventeen point eight million dollar overall provision, 148 basis points is actually allocated to Stage 1 . Just to give you a sense of how we view the market has changed, I think at the beginning of COVID, our whole loan loss provision added up to something like, was it 74 basis points or something? So we have, we have doubled the provision just on the Stage 1 , which is the lowest risk portion of the portfolio.
We have doubled the provision in Stage 1 that we had in the entire portfolio at the beginning of COVID. That shows you that we're trying to be conservative, and that we've taken much bigger provisions to reflect, you know, the weaker market.
Right. I'll just confirm for you as well, Rasib, that we have not written off anything year to date. Like, you know, we as Rob mentioned, we've built up our provisions for specific loans and specific situations, but once we reach a point in the process where we settle, that's where we would, you know, proceed with the write-off. But presumably, since we are providing, you know, there wouldn't be, you know, much of a financial impact, assuming our reserves are appropriate.
Okay, understood. I had two quick questions here. The upcoming debenture in June of next year. What are your plans for that? Are you planning on refinancing it or maybe leaning on your credit facility till rates come down?
So right now we have, you know, 100 million available in our line of credit. So, we'd love it if the, if the convertible market opened up, convertible debenture market opened up. But the only parties who have done it have paid a very high coupon that we're simply not willing to pay. So, you know, our preference would be if we could get a rate that we could be comfortable with to, to do it in the capital markets. But assuming, it isn't, and that's sort of what we've budgeted for by leaving lots of liquidity, then we'll just pay it off in the line of credit.
Good. Okay, understood. I think that's everything. Thank you.
Okay.
Thank you. Once again, should you have a question, please press star then 1 on your telephone keypad. Mr. Goodall, there are no further question at this time. Please proceed.
Okay. Thank you very much for attending our conference call. And, for those of you who are shareholders, appreciate your continuing commitment to the company. Have a good day.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.