Atrium Mortgage Investment Corporation (AMIVF) CEO Rob Goodall on Q1 2022 Results – Earnings Call Transcript

Atrium Mortgage Investment Corporation (OTC:AMIVF) Q1 2022 Earnings Conference Call May 12, 2022 4:00 PM ET

Company Participants

Rob Goodall – President, Chief Executive Officer and Founder

Jennifer Scoffield – Chief Financial Officer

Conference Call Participants

Graham Ryding – TD Securities

Operator

Welcome to the Atrium Mortgage Investment Corporation’s First Quarter Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, May 12, 2022. Certain statements will be made during this phone call that may be forward-looking statements. Although Atrium believes that such statements are based upon reasonable assumptions, actual results may differ materially.

Forward-looking statements are based on the beliefs, estimates, and opinions of Atrium’s management on the date the statements are made. Atrium undertakes no obligation to update these forward-looking statements in the event that management’s beliefs, estimates, or opinions, or other factors change.

I would like to turn the conference over to your host, Mr. Goodall, President. Please go ahead.

Rob Goodall

Thank you, and thank you for calling in today. Our CFO, Jennifer Scoffield, will start by talking about our financial results, and then I will speak about our performance from an operational and Portfolio perspective.

Jennifer Scoffield

Atrium had a great start to the year, for the quarter ended March 31, 2022 we had revenues of $16.4 million consistent with the first quarter of 2021. Mortgage interest and fees were consistent with the first quarter of 2021 as the increase in the size of the mortgage portfolio was offset by a lower weighted average interest rate for the current quarter.

Our net income for the quarter was $10.6 million, up from $9.9 million in Q1 2021, and our earnings per share were $0.25 compared to $0.23 in the first quarter of 2021. During the quarter we declared dividends of $9.6 million or $0.225 per share. Our earnings per share of $0.25 exceeded dividends declared by $0.025 per share this quarter. Operating expenses for Q1 2022 excluding the recovery of mortgage losses and impairment remain consistent with prior quarter at approximately 1.1% of assets on an annualized basis.

We booked a recovery of mortgage loss this quarter of $1 million, which was a result of the sale of the property securing the impaired loan classified as Stage 3 at a price in excess of the sales price used at year end to estimate the expected credit loss on that loan at that time. This sale closed in mid-April and the loss was considerably less than what we had previously estimated. Our total allowance for loan losses at March 31 was $9.4 million or 1.2% of our gross portfolio and the allowance for mortgage loss on performing loans, which are those loans, classified as Stage 1 and Stage 2 and not considered impaired totaled $7.7 million at March 31, 2022 or 0.98% of all performing loans. During the quarter, we successfully negotiated a settlement of $800,000, some of the guarantors of a loan on which we incurred a loss three years ago. This amount was collected in April.

During the first quarter we made the decision to stop actively marketing for sale, the 90-unit property in Regina, due to a higher-than-usual vacancy rate at the beginning of the quarter, and to allow for the completion of maintenance work on the property. After considering the above, as well as other real estate transactions under negotiation and Regina at that time and the economic conditions in Saskatchewan, we recorded an impairment of $1.8 million on this property in Q1.

Our interest expense for the quarter was $3.6 million, an increase of 6% from Q1 2021. This increase was due to a higher balance being drawn on our credit facility during the current quarter, and a higher weighted average cost of borrowing. The annualized weighted average interest rate on our credit facility was 2.92% this quarter compared to 2.76% in the first quarter of 2021. Our mortgages receivable balance at March 31, 2021, with $786 million an increase of 3.5% from year-end in the highest in Atrium’s history.

During the quarter we funded mortgages totaling $140 million and had repayments of $117 million. At March 31, 2022 the portfolio had a weighted average loan-to-value of 61.1%. The weighted average interest rate on the portfolio at March 31st was 8.32%, an increase of 6 basis points from December 31, 2021. We believe the rising interest rate environment should have a positive impact on our earnings. Since at March 31st approximately 52% [ph] of our portfolio was priced at a floating rate. The majority was rate floors, while only approximately 22% of our source of funds were priced at floating rates.

We closed the quarter with a conservative debt to total assets ratio of 42.5% and total assets of $825 million, again the highest in Atrium’s history.

I will now pass you over to Rob Goodall, our CEO.

Rob Goodall

Thank you.

As Jennifer mentioned, Atrium MIC generated strong earnings per share of $0.25 in Q1 and it was a quarter in which all-but-one of our commercial loan arrears will repay. So the balance sheet is in great shape and we’re off to a good start for 2022. We had a near record level of $140 million of loan advances in Q1, up substantially from $93 million from Q1 of 2021, a year earlier. Any quarter where we surpassed the $100 million mark for new mortgage advances is a very good quarter for us.

As I’ve mentioned in previous calls, this high level of origination is a reflection of the expansion of our debt team. For the quarter the mortgage portfolio increased by 3.2% from $767 million to $791 million. This growth occurred despite another quarter of high-turnover. Loan repayments were again unusually high at $116 million. As you may recall, we experienced an unprecedented 58% loan – portfolio loan turnover in 2021. And based on the first quarter of 2022 our annualized turnover would be 60%. But unlike last year, many of the loan repayments in Q1 were in the Vancouver market, including the loans which were in arrears.

We have shown by now that we’re capable of originating enough business to deal with whatever the repayment situation is in a given year. I continue to believe that Atrium’s loan portfolio will grow larger as the year progresses faring a material slow down in the residential and commercial real estate market. A loan quality of the portfolio improved materially in Q1. The three loans and arrears in Vancouver, which were cross collateralized by four properties, were repaid in full. In fact the three loans were fully repaid after the borrower sold only two of the four properties. This confirms what we had stated previously namely that our loan to value was always very safe.

In addition, shortly after quarter end we were repaid on the only loan in the portfolio that was impaired. Again, there was good news. We sold the property for more than expected and had a net recovery of $1 million on our loan loss provision. As a result today, we have only one, $6 million commercial loan and one, $650,000 single family loan in default representing less than 1% of the total mortgage portfolio. And we continue to have an ample loan loss provision, which now totals $9.4 million equal to 119 basis points. The average loan to value of the portfolio also remains steady in Q1 at 61.1% and continues to remain well below our target of 65%.

Turning to our operations, approximately 86% of the funded loans in Q1 were from Ontario and 14% from BC. The geographic composition of the portfolio is now 71.5% in Ontario, 27.5% in BC and less than 1% in Alberta. We are comfortable with this geographic allocation.

By sector 93% of the new loans funded in Q1 were residential or multi-residential loans with a balance being commercial loans. The single family mortgage division had another strong quarter with $29 million of funded loans, up from $18 million last quarter. While single family mortgages do have a lower than average mortgage rate, they also have a lower risk profile. The single family portfolio is entirely located in the GTA, Ottawa, Hamilton and Kitchener, and all of the mortgages are under 75% loan-to-appraised value.

In Q4 our average mortgage rate was 8.32%, up from 8.26% last quarter. This was mostly due to the one quarter of 1% increase in the prime rate of interest on March 3rd, which allowed Atrium’s prime-based loans, which represents 62% of the portfolio to be re-priced. Atrium’s percentage of first mortgages remain very high at 91%, each of the three provinces where we operate has more than 88% of its portfolio in first mortgages.

It’s worth noting that the percentage of construction loans now represent less than 7% of the total portfolio. Given that the level of – given the level of inflation that is occurring in construction costs, we feel that a conservative level of exposure in construction loans is appropriate at this time. Perhaps the risk metric which best exemplifies our defensive lending philosophy is at 98.3% of the portfolio is less than 75% loan to value. This is a percentage that is significantly higher than our peers and reflects a very defensively oriented mortgage portfolio. So our strong earnings per share continues to be achieved even as we lower the risk profile of the portfolio.

Turning to defaults. Defaults in our commercial and multi-residential business was limited to two borrowers at quarter-end and only one borrower by April 15th. The first was a $5.8 million first mortgage on an estate subdivision in Southwest Calgary. You may recall that we decided to pull the listing for this project from the market for six to nine months in the spring of 2021, as the Calgary housing market was showing signs of strength for the first time in many years. Our decision to delay the listing was rewarded in Q1 of 2022 when two strong offers were received. The ultimate sales price ended up being more than we conservatively estimated and as a result, there was a $1 million recovery in the loan loss reserve. Please note that this is the only loan in the entire portfolio where we expect to incur loss.

The other loan is a $6 million first mortgage in Sutton, Ontario. Interest on this loan is actually current but the loan is categorized as being in technical default because we engaged a private receiver in late 2021 in order to complete site servicing. Atrium is funding the senior tranche of the first mortgage and has an estimated loan-to-value of 64%. So we do not see any risk of loss. Our collateral consists of 138 draft-plan approved building lots which are fully pre-sold to a credible home builder, as well as a six acre school site and a small commercial block.

The receiver has hired a contractor to complete site servicing by the fall of this year at which time we expect to be repaid in full. At that time, we would have zero defaults in the commercial and multi-residential portfolio. Defaults in the single-family mortgage portfolio, which represents 11.9% of the total mortgage portfolio consisted of only one-loan totaling $650,000. So overall we feel exceptionally comfortable with the quality of the portfolio. Please note that we analyze and risk rate each loan every quarter to make sure we keep on top of any new issues.

Turning to foreclosures, we continue to have two foreclosed properties totaling $14.3 million, which is a reduction of $1.8 million from last quarter as Jennifer mentioned. The first is a fourplex in Leduc and the second is a 90-unit rental project in Regina. The Leduc cost base is $1.1 million and the cost base in Regina has been reduced from $15 million to $13.2 million. The fourplex in Leduc is a 100% leased and was throughout 2021.

The occupancy rate in the Regina apartment improved from 80% to 89% during the last quarter. The decision to increase the level of online marketing, increased traffic at the property and assisted in reducing the vacancy rate. However Regina’s rental market is relatively weak with an average vacancy rate of 7.1% across the city. As a result, we decided to write down the caring cost to apprise more reflective of today’s market conditions. Notwithstanding the write down, these properties continue to generate significant distributions to Atrium each quarter.

Our economic commentaries is as follows. Economic growth continues to be very strong with estimated GDP growth of 5.6% in Q1 and a forecast of 4% GDP growth per caliber 2022 as a whole. This growth forecast follows an equally impressive 4.9% growth rate in 2021. The Bank of Canada recently declared that the economy was moving into excess demand with very low unemployment and wages rising, not surprisingly the Bank of Canada overnight rates has risen 75 basis points in the last 45 days, and further rate increases are expected in 2022.

However, some economists are concerned about the possibility of recession because of rising inflation, which reached 6.7% in March, the highest in three decades. Historically, at the beginning of rate hiking cycles as more often than not proven to be in precursor to a recession. Even as Bank of Canada Governor, Tiff Macklem acknowledged that engineering a soft landing is not going to be easy. The root of the problem is inflation is proven to be more resilient than previously expected. Keeping inflation expectations well anchored is viewed as critical because otherwise it becomes more at a higher level.

A one half, 1% rate increase is widely anticipated by the Bank of Canada on June 1st, especially after the Fed raised its U.S. benchmark rate by one half of 1% on May 4th. Canadian economists expect further rate increases in 2022, which would move the overnight rate currently at 1% past the pre-pandemic level of 1.75%. But some very credible economists still believe that the inflation surge is temporary and will drop sharply in 2023. For example, one respected economist from CIBC recently stated that 65% of inflation that we’re now seeing is COVID related, and I recently heard former Bank of Canada, Governor, Steve Poloz, say that up to 75% of current inflation is transitory.

Turning to the real estate markets, in the first quarter of the resale and new home markets remained very strong. Looking first at resales the housing market was exceptionally strong in 2021 and through the first two months of 2022. In March, the market slowed very slightly with resale’s decreasing by 5.4% nationally in part due to a lack of supply. The national home price was up 1% in March versus our record 3.5% from January to February. The slowing of price growth nationally in Q1 should not be surprising after the substantial 27% run-out prices last year and indeed since the beginning of the pandemic.

In addition, the five-year mortgage rate is now about 4% per annum, which means that our fees [ph] stress test is more onerous for purchasers, so most purchasers will have their loans underwritten at a rate of approximately 6%. In Q1, our two target markets, the GTA and Metro Vancouver mirrored the national trend and the GTA resale slowed in March, although it still represented the third best March on record. The composite benchmark price rose 34.8% and the average price was up 18.5% on a year-over-year basis.

The different growth rates between the benchmark and the average price reflect a shift in sales in favor of more affordable – in favor of the more affordable condominium sector. The newly released April results showed a further softening with sales drop in 20% from last month and the largest declines being detached homes in the suburbs. In the GTA benchmark – the GTA Benchmark Index in April was down 1.6%. The first monthly decline since October 2020, interestingly, the City of Toronto rose 1%, the only region to increase within the GTA. In Metro Vancouver, March sales slowed but we’re still 25.5% above the 10-year average for that month.

The composite price index was up 20.7% year-over-year and 3.6% from February. In April sales were down 26% on a monthly basis and the benchmark price was up 1%. Similar to the GTA the more affordable townhouse and condo sectors were stronger than for detached homes. The lack of supply in Vancouver is less than half of what is estimated to be required to shift the Vancouver market into balanced territory.

The new home markets in Toronto and Vancouver were also very healthy in Q1 and the GTA on a year-over – on a year-to-date basis, there has been a small 2.1% increase in sales compared to the same period last year. The number of high-rise sales were up 50% while the low-rise sales saw decline of 60%, largely due to a lack of inventory. On a year-over-year basis the high-rise inventory decreased by 26.6% while the low-rise inventory decreased by almost 54% for an overall inventory reduction of 31%. The benchmark price in March of 2022 for new low-rise product rose 27.3% on a year-over-year basis but dropped 1.1% in price from February. The benchmark price for a new high-rise product was up 17.7% year-over-year and saw a 6.3% month-over-month price increase in March. In Q1 2022, we saw the price gap between low-rise and high-rise began to narrow. So the trend towards more affordable product is also occurring in the new home market.

The latest information for new home sales in Vancouver is rather dated Q4 2021. In that quarter, Vancouver saw record breaking multi-family sales, which were 40% higher than Q3. The main driver of the increased multi-family home sales was the strong demand in the South of Fraser submarkets, where prices are generally more affordable. The number of sales recorded in Q4 exceeded the amount of unsold inventory at the end of the quarter by 1,800 units. The last time this was experienced in Metro Vancouver was in 2016, and total inventory was down 14%.

I think it’s fair to conclude that in early Q1, the GTA and Greater Vancouver markets were an overdrive and price increases were accelerated. It appears from the data that the Canadian market peaked in February with the rise in mortgage rates, the markets have slowed from a very high base. We expect the housing market to continue to cool for the remainder of 2022 and bring the market into balance. It’s worth remembering that offsetting rising mortgage rates is an exceptionally strong economy, a very low unemployment rate and strong demographics, including immigration. There are also no signs of oversupply or overbuilding. In fact, the supply of homes in the resale market amounted to only 1.8 months of inventory across Canada in March.

To summarize Q1 was another strong quarter for Atrium. In fact, our earnings per share for calendar 2021 and for Q1 of 2022 have been the highest of our peer group of mix. In addition, our loan portfolio is very clean with less than 1% of the portfolio being in default. From a portfolio perspective we are now exceptionally well positioned to endure a slowdown in the Canadian real estate markets if that happens. Market conditions are still relatively strong, but there are certainly some significant headwinds like inflation, supply chain issues and rising mortgage rates, which could dampen housing demand and increased cap rates on commercial real estate.

I suspect that by the end of Q2, we will have much better sense of the direction of the Canadian economy and real estate markets in particular. The good news is that we’ll not have to chase yield in 2022 to show strong earnings. The 50 basis point increase in prime, which occurred in April, will have a very positive effect on our interest revenues. Given that 62.6% of Atrium’s loans are priced on a prime plus basis. On the liability side, only our floating rate debt – our only floating rate debt is our $240 million line of credit, which represents 20% to 25% of total liabilities and shareholders’ equity. So any increase in prime will produce a net benefit to Atrium’s earnings.

We are continuing to build the CMCC team in all areas: origination, finance and mortgage servicing. Between March 28th and today we’ve hired seven new employees who have either just started or will be starting over the next quarter. We’re really pleased with the quality of candidates who are interested in working for our company. With the strength of our team at CMCC and the portfolio in exceptional shape we’re well positioned to have another very good year in 2022. Perhaps more importantly we’re also defensively positioned to withstand a downturn in economic conditions.

Thank you and we’d be pleased to take any questions from the listeners.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Graham Ryding with TD Securities. Your line is open

Graham Ryding

Hi. Good afternoon.

Rob Goodall

Hi, Graham.

Graham Ryding

So you said roughly 60% of your portfolio is floating rate. So if we see a 50 basis point increase in the prime rate, does that – does that sort of flow through roughly 30 basis points into your portfolio or is it happened right away or is there any assets that we should be thinking about?

Rob Goodall

Well, I think it’ll be – because our loan turns over a lot, I don’t think that’s a bad assumption but because our loan turns – loan portfolio turns over a lot. It could be that all the loans that we get repaid are fixed rate or floating rate or an unusual mix of the two. I can tell you that with the exception of single-family mortgages, which really need to be fixed rate, virtually everything we’re doing, which would be normally in a normal quarter 80T to 90% of our originations, those would all be – those will all be priced off of floating, so they would benefit. The new loans 80% to 90% of the new loans will benefit from increases in prime but it’s hard to say with the repayment of loans, how it all shakes out in Q2, but there’s – there will be a net benefit.

Graham Ryding

Okay. And then what about sort of, I’ve heard you talk in the past just go to competition is obviously an important factor with that sort of weight average more enjoyed the wealth. So what – what’s your sort of feeling on that front in terms of your outlook for the way it works mortgage rate to move higher here, because we’ve got interest rates going up, but what about the competitive landscape? Is there any – any get-back on that front?

Rob Goodall

I find it changes a lot, but if you – if you ask me right now, which is what you’re asking me, I’d say the competition feels less than it did last quarter. I don’t know what that means – I don’t know what that means, the private non-bank lenders maybe having more difficulty raising money in this environment. I wouldn’t be surprised if they are, which could advantage the three public mix who have obviously permanent capital. So I don’t – our pipeline of business is really strong right now, notwithstanding the market we’re showing the first signs of slowing down.

Graham Ryding

Okay understood. And then just – I know its early days in this sort of rate cycle increase and the market is just softened, I guess in March and April, but anecdotally or otherwise, are you seeing any slowdown or cautioned from your developer clients?

Rob Goodall

Yes. I mean, I think low-rise high-rise doesn’t matter. There’s – they’re seeing a slowdown in not so much in launches because you haven’t seen too many recent launches, but we’re seeing a slowdown in sales of projects that have already launched where they may have been selling six units a week and now they’re selling half that number. It’s not slowed down to standing stop, but it definitely has slowed down. We’re also seeing some people believing the cap rates are moving up, although any realtor will tell you that hasn’t happened yet, and maybe it hasn’t.

My guess is because the market was so hot, I’ve always historically found the cap rates narrowed between average deals and high quality deals in a hot market and with rising interest rates. I think that buyers are going to be more discriminating and probably continue to pay aggressively for really trophy assets, but not pay quite so aggressively for your average asset. So I think cap rates are going to move up as well, but they haven’t really moved yet from what I’m hearing.

Graham Ryding

Okay. That’s great. That’s it for me. Thank you.

Rob Goodall

Okay.

Operator

[Operator Instructions] There are no further question at this time. I would like to turn the conference back to Mr. Goodall.

Rob Goodall

Okay. Thank you for attending the conference call and for those of you who are shareholders, thank you for your continuing interest in the company. I hope you’re pleased with our – with our results. I know that we are. Have a good day.

Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.

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