Atrium Mortgage Investment Corporation (AI) Earnings Call Transcript

You will now enter the conference the Atrium Mortgage Investment Corporation second quarter results conference call. [Operator Instructions] Reminder that this conference has will be made during the long haul for although ample that such statements are based upon reasonable assumptions, actual results be discern. Forward-looking statements are based on beliefs, estimates of Atrium's management statements are making. Atrium undertakes no obligation to update forward-looking statements in the event that management's beliefs, estimates of mines or other factors change. I would now like to turn the conference over to your host, Robert Goodall, CEO of Atrium. Mr. Goodall, please go ahead.

Thank you, and thank you all for calling in this morning. Our CFO, Chris Anastasopoulos is joining me today. Chris will I'll begin with an overview of our financial results, and then I will speak about our performance from an operational and portfolio perspective.

Thank you, Rob. Atrium delivered solid financial results for shareholders in the second quarter despite mixed market conditions and ongoing economic uncertainty. For the second quarter, Atrium generated net income of $11.7 million and our Basic earnings per share was $0.24 per share compared to net income of $13.1 million and basic earnings per share of $0.28 in the comparative quarter of 2025. Our quarterly earnings continue to exceed our regular quarterly dividend of $0.2325 per share -- the weighted average interest rate on our mortgage portfolio declined to 8.69% at June 30 from 8.86% at March 31, 2026. And as higher-yielding loans were repaid and replaced with new loan originations priced at lower yield based on current market conditions. As of June 30, 2026, 80.9% of the mortgage portfolio was priced at floating interest rates, with the majority of loans having interest rate floors in place. The mortgage portfolio ended the quarter at $860.1 million which was a decrease of 6.2% from $97.1 million at December 31, 2025. The decrease was due to unusually high mortgage repayments outpacing mortgage advances in the second quarter. with $88.2 million of mortgage principal advanced and $121.9 million repaid and transferred net of write-offs of $1 million during the quarter. This resulted in a portfolio turnover rate of 58% on an annualized basis compared to 38% for 2025, which is an indicator of a healthy portfolio. We expect repayment activity to moderate over the balance of the year. As at June 30, 2026, 96.9% of our mortgages were first mortgages, and we had maintained a conservative weighted average loan-to-value ratio of 62.5% in for the portfolio, up from 61.4% at year-end. Our mortgages classified as Stage 1 were $704.6 million at June 30, 2026, down million from $782.4 million at December 31, 2025. Stage 2 mortgages rose to $93.9 million, up $45.2 million from $48.7 million at December 31, 2025. This included $24.4 million of mortgages transferred to Stage 2 for being over 30 days past the maturity, however, these loans remain current on their interest payments. Most importantly, Stage II loans decreased 28% to $61.5 million at June 30, 2026, down from $86 million at December 31, 2025. The -- this was primarily due to $46.3 million in repayments, partially offset by the addition of a $13.5 million loan that went into developed for being over 30 days past maturity although the loan remains current on its interest payments. The total allowance for credit losses was $30.1 million at June 30, 2026, a 1.3% decrease from $30.5 million at December 31, 2025. The due to the reduction in the mortgage portfolio, the allowance for credit losses represents 3.5% of the portfolio, up from 3.32% at December 31, 2025. I -- by stage, the allowance breaks down as follows. The Stage 1 allowance increased to $7.3 million from $6.1 million at year-end, representing a 104% increase in stage 1 loans. The stage 2 allowance grew to $8.1 million from $2.9 million at year-end, consistent with the migration of loans into this category, and the stage streams declined significantly to $14.7 million from $21.5 million at year-end, in line with the reductions in Stage 3 balances discussed previously. Our balance sheet remains strong, liquid and well capitalized. At June 30, 2026, our debt remained low at 36.5% of total assets was $224.1 million drawn on our $380 million credit facility leaving healthy available capacity. -- weighted average cost of borrowing on the credit call declined to 4.67% for the quarter compared to 5.1% in the same quarter last year and 5.8% for the full year of 2025. The Board also declared monthly dividends of $0.0775 per share for the month of October, November and December 2026, consistent with our previously announced $0.93 per share standard dividend for the year. Overall, these results reflect another quarter of consistent performance for our shareholders, notwithstanding the challenging market backdrop. We remain disciplined in our risk management approach, continue to strengthen our team's capability manage expenses prudently and are focused on maintaining a balance sheet that can weather the pressures of the current economic cycle while pursuing new lending opportunities as they arrive. I will now pass you back to Rob for the business and portfolio updates.

Thank you, Chris. As Chris said, Atrium MEC had a solid second quarter with basic earnings per share of $0.24. The year-to-date results of $0.49 are comfortably above our dividend of $0.465 per share. The portfolio declined 4% on a quarter-over-quarter basis from $896 million last quarter to $860 million at June 30. This occurred despite having our highest level of loan production since Q2 of 2025. The DC office made a significant contribution to loan production in Q2 and and is off to a good start in Q3. The drop in the portfolio in Q2 was due to an unusually high level of repayments totaling $122 million. repayments are often lumpy on a quarterly basis, and we expect repayment activity to moderate over the balance of the year. In terms of the composition of the portfolio, Commercial loans grew to 30% of the portfolio, up from 29% the previous quarter and house and apartment mortgages increased to 23.4%, up sharply from 20.1% in Q1. Combined, our exposure to these 2 preferred sectors now represents 53.4% of the portfolio up sharply from 49% just last quarter and 23% of the portfolio in 2023. The total of high ratio loans, that is loans over 75% loan-to-value was $82 million in Q2, virtually unchanged from the previous quarter and equal to roughly 9.5% of the total portfolio. There was approximately a 50-50 split between single-family loans and commercial and multi-residential loans. In Q2, the average loan to value of the portfolio increased slightly to 62.5% and continues to be well within our desired range of 65%. Atrium's percentage of first mortgages remained elevated at 96.9%, which is 1 of the highest levels we've ever recorded. I expect that this figure will drop in the next quarter given that we are reviewing 2 new second mortgage proposals, but it will still remain high relative to historic norms. Construction loans within the portfolio increased to $52 million in the quarter from $43 million in Q1 and as we're more comfortable lending in this area given the return of more stable construction costs. We recently funded 2 construction loans which balances will increase over the next year, and we're currently looking at construction loan opportunities, so this figure is expected to continue to gradually increase. Turning to portfolio quality, the portfolio quality improved in Q2, Stage 3 loans, which are considered impaired loans, decreased from $95 million last quarter to $62 million at the end of Q2 as we anticipate. The 2 large Phase III loans representing $41 million that we expected to be repaid or refinanced by the end of May, were, in fact, resolved during the quarter, more than offsetting the addition of 1 $13.5 million commercial loan and moved into Stage 3 only because it is 90 days past maturity, although the border remains current on its interest payments. Stage 2 loans increased to $94 million from $66 last quarter largely reflecting $24 million of loans that migrated into this category for being over 30 days past through their contractual maturity date. As was the case last quarter, these borrowers remain current on their interest payments, and we have no fundamental credit concerns with these loans. Turning to the loan loss reserve, we expensed a loan loss provision of $137,000 in the second quarter compared to 651 in the previous quarter. Itron's total allowance for credit losses for the quarter was $30.1 million equaled to 350 basis points on the overall mortgage portfolio and up slightly from 347 basis points in Q1. My economic commentary is as follows: Bank of Canada held its policy rate steady at 2.25% through the second quarter while trimming its 2026 growth forecast to 0.7% to 1% and trade uncertainty with the United States continues to weigh on exports and business investment. Canadian CPI came in at 2.8% year-over-year in June, easing from 3.2% in May as gasoline prices moderated and the Bank of Canada does not expect inflation to return to its 2% target until early 2020. Meanwhile, the U.S. Federal Reserve also held its policy rate steady in July at a rate of 3.5% to 3.75%, even as U.S. I of 3.5% in June remains well above the Fed's target of 2%. Both Central banks continue to flag the ongoing conflict in the Middle East as a key risk to the inflation outlook, given its impact on global oil prices. Turning to commercial real estate. According to CBRE, commercial real estate markets continue to stabilize in Q2 and -- the all properties capitalization rate grew 3 basis points lower in Q2 after dropping by 2 basis points in the previous quarter. The office sector, which had experienced weakness over the last few years has now posted 4 consecutive quarters of net absorption. Absorption in Q2 was led by Toronto, Calgary and Montreal, with downtown fundamentals improving in all but 1 Canadian market. The vacancy rate in Downtown Toronto was down to 14.1%, although the suburban vacancy rate is still elevated at Cuper has 1 of the lowest vacancy rates, 12.2% downtown and 11% in the suburbs. The industrial sector, national availability declined for the first time since Q3 2022, declining by 10 basis points to 5.5%. And Activity was led by, again, the GTA, Montreal and Vancouver. Vacancy rates at the end of the quarter were 3.4% in Toronto, 5% in Vancouver in Calgary and 2.7% in Edmonton. We already reported apartment trends for June. Vacancy rates were 4.2% in Vancouver, 4.8% in the GTA in Edmonton and 6.8% in Calgary. Calgary, in particular, has experienced a large increase in supply, which has increased the vacancy rate. rents on new purpose-built rentals have decreased in all 4 markets from their peak levels. But overall, commercial real estate has held up remarkably well as we enter the fifth year of a real estate downturn. Turning to the residential and multiresidential real estate. In the GTA resales increased by 9.4% on a year-over-year basis and was also up on a month-to-month basis, and listings declined by 13% on a year-over-year basis. The story was similar in Greater Vancouver where June resales increased by 9.6% year-over-year and new listings decreased by 6%. So overall market conditions tightened slightly in both cities in June. Calgary and Edmonton, June resales were down 3.8% and 4.1%, respectively. However, relative to the population sizes of the GTA in Vancouver, these Alberta markets had much stronger retail activity. Turning to new home sales, the relatively soft resale market conditions have contributed to very slow activity in the new home sales market across most Canadian markets. There were 5,400 new home sales in the GTA from January to June, representing an increase of 102% compared to the same period in 2025, but it's still 52% below the 10-year average. Low-rise sales continued to lead the way as they have for the last 3 months since the introduction of the HSD rebate program with 4,000 new sales, representing a 145% increase versus last year. Though rise sales are actually now 36% above the 10-year average. Conversely, high-rise sales struggled and remain 85% below the 10-year average. Industry experts have been forecasting a recovery in the low-rise sector first, and this has proven accurate. In Greater Vancouver, buyer demand was soft in Q2 with 1,100 new home sales up from the previous quarter, down from last year. Similar to Toronto, most new home sales were actually recently completed unit units, which highlights the buyers prefer a ready-to-move in product. The weakest sector in both the GTA and GVA remains the high-rise condominium market which will start to recover once the excess supply is absorbed. In the GTA, condo inventory under construction has dropped to 38,250 units from 48,400 units just last quarter and from a high of 15,400 units in mid-2023. So the excess supply and the amount of product under construction is dropping fairly quickly. To conclude, we had a good quarter overall with an improvement in portfolio quality as our Stage 3 loan balance drop from $62 million -- it dropped to $62 million from $95 million last quarter. Despite the decline in our mortgage portfolio this quarter, we had our most active quarter for new business in 12 months, and I believe we're well positioned heading into the second half of the year. While it's always difficult to forecast loan production and repayments from quarter-to-quarter, I do believe that the loan portfolio will increase to at least $900 million by the end of the year due to a slowdown in repayments and contributions in new loan business from all 3 of our offices. The biggest change in the second half will be a larger contribution to new loan production from Western Canada. The D.C. office had a strong quarter of origination in Q2 and has a full pipeline of potential loans in Q3. Our Alberta office opened in mid-April, and we've already closed 1 loan and negotiated binding commitments on 2 others. As I've mentioned in the past, Atrium's results have historically been strong during periods of uncertainty. In Q2, we continued to that legacy of delivering strong, consistent results for our shareholders despite challenging market conditions. Atrium remains on solid footing with ample financial resources to take advantage of opportunities in the market. That's all for the presentation, but we're pleased to take any questions from listeners.

The Q&A session will now begin. [Operator Instructions]. First question goes to James Gloyn of Nation Bank Capital Markets. James, please go ahead.

First question, just on the growth guidance or target to the year over $900 million. Could you just give us a little bit more color as to the the pipeline? Do you have some deals expected to close already in Q3? Or how does that shape up? What gives you the confidence to hit that level?

As I said, it's always hard to predict. But just based on the pipeline that we have in place now of loans that we think we're going to win. And based on what we've closed to date, but it's still early in the quarter. I think we'll certainly be higher than we ended this quarter at -- and I think both Q3 and Q4 will ratchet up our balance, and we're thinking we will be over $900 million by the end of the year.

Okay. And then anything on the repayment side of things? Obviously, turnover a lot more elevated this quarter and perhaps unexpectedly so. Are there any indications that, that more elevated repayment activity or turnover activity could continue into the second half of this year? Or is that really something that was somewhat one-timey?

Well, as I said, the repayments are often lumpy. I can tell you, this quarter, it doesn't seem like the repayments are going to be significant. But sometimes that can change quite quickly because most repayment terms on our loans are either 30- or 60-day notice requirements for repayment. So it could change. But right now, the repayments don't seem anywhere near what they were in Q2. SP1 Okay. Great. And then shifting to the credit side of the story, pretty good performance this quarter from a PCL standpoint, the Stage 3 improved as you guided to -- and then you've made some comments as well about the Stage 2 loan increases and how they're 30 days past maturity, but still current on interest payments.

Maybe just sort of walk us through your strategies and your process for, I'll say, curing those loans, but bringing them, I guess, either to a renewal or a successful refinancing. What's your process? And maybe some comments specifically about those 2 homes and their trajectory?

Okay. So those loans are 30 days past due, the borrower sometimes we will offer a renewal and a board where we'll think, well, I've improved the property or increased fee income on the property. And I think I can get cheaper financing. And what ends up happening is they don't sign back a renewal offer and the search fees they can find cheaper financial. They keep us current during that period of time, and we're not going to call the loan because we're hoping to renew it. So it's just a fact of life. -- in commercial real estate lending that sometimes is born risk, sometimes some of your best borrowers who you don't want to run your relationship with forever. -- and the call alone, I mean, legally, you'd be on thin ground anyway if they were keeping the interest rates current. But the point is we like those loans. We're hoping that we will renew them but under new IFRS 9 rules, and this didn't used to be the case. You have to consider them Stage 2, even though they had the risk profile of what you would think would be a stage 1 loan. That gives you the context of what these loans are both.

Yes. Okay. Great. That's well understood. And then I apologize if I missed it on the in your prepared remarks about the 1 commercial loan in Stage 3 that that is now 90 days past its maturity, but still current. What's the situation there in terms of [indiscernible].

Okay. So those loans are 30 days past due, the borrower sometimes we will offer a renewal and a board where we'll think, well, I've improved the property or increased fee income on the property. And I think I can get cheaper financing. And what ends up happening is they don't sign back a renewal offer and the search fees they can find cheaper financial. They keep us current during that period of time, and we're not going to call the loan because we're hoping to renew it. So it's just a fact of life. -- in commercial real estate lending that sometimes is born risk, sometimes some of your best borrowers who you don't want to run your relationship with forever. -- and the call alone, I mean, legally, you'd be on thin ground anyway if they were keeping the interest rates current. But the point is we like those loans. We're hoping that we will renew them but under new IFRS 9 rules, and this didn't used to be the case. You have to consider them Stage 2, even though they had the risk profile of what you would think would be a stage 1 loan. That gives you the context of what these loans are both.

Yes. Okay. Great. That's well understood. And then I apologize if I missed it on the in your prepared remarks about the 1 commercial loan in Stage 3 that that is now 90 days past its maturity, but still current. What's the situation there in terms. recovered from that loan. Maybe you could talk about like the geographic and asset-type exposure. What -- maybe just some more color on that 1 specifically. Sure. We're not worrying about that 1 either.

That 1 is 90 days past due because they're looking for and are very close to getting replacement financing. It's a rental project. It's a purpose-built rental project. So right now, it's land, it's going to be is going to have a fertile rental project built on it. and they're very close to financing. And so we offered a short-term renewal with a B, they don't want to pay the fee. So they're paying the interest of not accepting the renewal. And there's 2 of us that are lending on that project. And again, we're not going to call it a loan. We know that probably in the next 3 months that financing will be secured. Because we sort of checked it out that we're pretty comfortable that financing is going to be secured.

Excellent. And then last one, just on the weighted average interest rate tick down kind of as expected as rates were moving lower. We have stability in overnight rates the lager bond or a longer part of the curve is ticking a little bit higher. What's your expectation about how that where will evolve here in the second half of.

The irony is the old legacy loans, some of which were in stage 3. So some we paid off $41 million of Stage II loans. They are older loans that were booked when rates were higher. So the good news is we got repaid on the loan, full principal and interest. The bad news is they had high rates on them. That was probably the biggest contributor to the reduction in the average interest -- so it was sort of a good news, bad news thing. We're happy to get repaid. Unfortunately, it was 1 of our highest higher-yielding mortgages. So I think it will be on and thinking it will be more stable going forward.