2024 EPS Beat: A Cautious Outlook Amid Tariff Threats

• In 2024, mortgage receivables (gross) decreased 1.5% to $863M vs our estimate of $850M.  As 84% of AI’s portfolio are floating-rate mortgages, its average lending rate has declined with the Bank of Canada’s cuts.
• Revenue was down 1.3% YoY, missing our estimate by just 0.1%.  While EPS fell 10% YoY, it was still 1.4% higher than our forecast, driven by lower-than-expected loan loss provisions.
• Dividends decreased from $1.19 to $1.06/share vs our forecast of $1.04/share. Annual regular dividends were increased from $0.90 to $0.93/ share, effective December 2024.
• Per management's guidance in the Q3 earnings call, stage three (impaired) mortgages declined significantly in Q4.
• Due to sluggish sector activity, particularly in development and construction projects, the company has been increasing its exposure to lower-risk property types, such as single-family residential and income-producing commercial properties, which should reduce portfolio risk, and yields. 

• Since June 2024, the BoC has cut rates six times (200 bp), with the potential for one or two more cuts this year, due to slowing GDP growth, high unemployment, and cooling inflation. Consequently, we anticipate AI’s transaction volumes to rise this year.
• While lower rates have historically boosted MIC/financial stocks, Trump’s tariff threats have negatively impacted both Canadian and U.S. equities across the board. Although tariffs will not directly affect MICs, we believe they could be impacted by a potential tariff-induced recession.
• Given the uncertainties, we are taking a cautious stance on MIC/financial stocks. We expect Trump may reverse or soften his new tariff measures due to their potential negative impact on U.S. consumers and businesses. Should this occur, we would revert to a bullish stance on MICs.
• We believe AI is well-positioned to navigate economic uncertainties, given its strengthened portfolio, featuring more first mortgages, fewer stage-three mortgages, and an enhanced focus on relatively low-risk properties.

Price and Volume (1-year)

Portfolio Update

Loan advancements were up 25% YoY; repayments were up 24% YoY. Net mortgages outstanding were down 2% to $863M vs our estimate of $850M. We believe transaction volumes will continue growing this year, driven by lower interest rates

Duration and the average mortgage size decreased, while exposure to first mortgages increased, implying a lower risk profile

Lending rates decreased due to the BoC’s rate cuts. Increased exposure to commercial projects while scaling back on residential development projects; management is currently focusing on lower-risk property types, such as single-family residential, and income-producing commercial properties

Increased exposure to ON while sharply reducing exposure to B.C. due to  higher B.C. repayments, and more attractive opportunities in ON

As AI’s lending is driven by project merit, not provincial targets, we note that exposure may shift in the coming quarters

In Q4, stage three (impaired) mortgages decreased 64% QoQ to 3.3% of mortgages. We were pleased but not surprised, as management had previously guided that stage three would decline in Q4

Despite lower stage three mortgages, management raised loan loss allowances by 80 basis points to 3.3% of mortgages for conservatism

Overall, we believe the portfolio’s risk profile has decreased, with six green, and two red signals 

Financials

2024 revenue was down 2% YoY, amid lower lending rates, coming in just 0.1% below our estimate. While EPS fell 10% YoY, it was still 1.4% higher than our forecast, driven by lower-than-expected loan loss provisions

Dividends decreased from $1.19 to $1.06/share, still beating our forecast of $1.04/share. Annual regular dividends were increased from $0.90 to $0.93/ share, effective December 2024

Debt-to-capital declined 5 pp, due to lower mortgage receivables, and a $29M equity raise in Q4

FRC Forecasts 

Amid the looming risk of a tariff-driven economic downturn, we are increasing our 2025 loan loss provision estimate, and reducing our EPS estimate accordingly

Our estimate for the 2025 dividend varies between $0.84 and $1.12/share, as loan loss provisions and lending rates vary

Comparables Analysis and Valuation

Sector multiples are down 5% since our previous report in November 2024, but flat YoY. Our fair value estimate decreased from $13.08 to $12.78/share, due to lower sector multiples, and our revised 2025 EPS estimate

We are reiterating our BUY rating, and adjusting our fair value estimate from $13.08 to $12.78/share, implying a potential return of 28% (including dividends) in the next 12 months. AI's 2024 financials largely aligned with our expectations. Although lower interest rates have historically benefited MIC/financial stocks, current geopolitical uncertainties, trade disputes, and the looming threat of a tariff-driven economic downturn are creating headwinds for the broader Canadian equity market. We believe AI's proactive portfolio adjustments, particularly its focus on lower-risk properties and first mortgages, position it well to navigate these uncertainties.

Risks

We believe the company is exposed to the following risks: 

• Diversification – over 90% of Atrium's mortgages are secured by properties in ON 
• Credit 
• A downturn in the real estate sector may impact the company’s deal flow 
• Timely deployment of capital is critical
• Investments in mortgages are typically affected by macroeconomic conditions, and local real estate markets
• Highly competitive sector 
• Like most MICs, the company uses leverage to fund mortgages
• Default rates can rise during recession
• Geopolitical risks and the potential for a tariff-induced recession

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