Adapting to Lower Rates Amid Market Softness

• In Q2 2025, gross mortgage receivables increased 5% QoQ to $921M, driven by a 9% YoY rise in loan advancements.
• As expected, lending rates continued to trend lower following BoC rate cuts. Q2 revenue declined 15% YoY (compared to a 13% drop in Q1), driven by lower lending rates, and came in 3% below our estimate. However, net income rose 14% YoY, in line with expectations, due to lower loan loss provisions. 
• Due to sluggish sector activity, especially in development and construction, management remains focused on increasing exposure to lower-risk property types, such as single-family residential and income-producing commercial properties. During the earnings call, management stated that amid near-term softness in real estate markets, they will remain disciplined in underwriting standards, and warned that loan originations and repayments will likely soften in H2-2025.

• Key portfolio metrics remained stable, with a high proportion of first mortgages (97%), and a relatively low LTV of 61%.
• That said, stage three (impaired) mortgages surged 135% QoQ to $46M (5% of mortgages), after AI revised its policy to classify all defaulted loans as stage three, even those with no expected loss. Despite this, AI lowered loan loss allowances by 19 bp QoQ to 3.14% of receivables, reflecting no anticipated incremental losses.
• Sector outlook has improved since our May report, with multiples rising 3% since, and 6% YoY. Declining rate environments have historically boosted MIC/financial stocks. 
• Since June 2024, the BoC has cut rates seven times (225 bps) to 2.75%, with two more cuts possible in the next six months amid slowing GDP growth, elevated trade tensions, high unemployment, and cooling inflation. While mortgage delinquencies remain a concern, we see easing risks due to falling rates. We expect a rebound in pre-sales, lower financing costs for developers, and higher transaction volumes for real estate lenders next year.
• With Q2 results largely meeting our forecasts, we are making no material changes to our outlook. We project a dividend of $0.98/share this year (unchanged), reflecting an 8.36% yield.

Price and Volume (1-year)

Portfolio Update

Q2 loan advancements were up 9% YoY; repayments were down 23% YoY. Net mortgages outstanding increased 5% QoQ to $898M

No material changes in key portfolio metrics. As expected, lending rates continued to trend lower following BoC rate cuts

Continued to increase exposure to revenue generating commercial properties while scaling back on residential development projects, implying a lower risk profile

No material change in exposure by province. Note that AI’s lending is driven by project merit, not provincial targets

Stage Three (impaired) mortgages, which fell 33% QoQ in Q1, spiked 135% QoQ to $46M (5% of mortgages) due to an elevated risk profile and Atrium’s decision to revise its stage three loan policy to align with industry standards

Now, all defaulted loans are classified as stage three—even those with no expected losses. In Q2, AI lowered loan loss allowances by 19 bp to 3.14% of mortgages, reflecting management’s view of no incremental losses

Financials

Q2 revenue was down 15% YoY (Q1 was down 13% YoY), amid lower lending rates, coming in 3% below our estimate. However, net income rose 14% YoY, in line with expectations, due to lower loan loss provisions

Annual regular dividends remained unchanged at $0.93/ share, reflecting a 7.94% yield. Debt/capital increased due to robust lending growth

However, interest coverage also improved, indicating robust EBIT growth, which is positive

FRC Forecasts & Valuation

As Q2 was largely in line with our expectations, we are not making any changes to our EPS forecasts

Our estimate for the 2025 dividend varies between $0.89 and $1.04/share, as loan loss provisions and lending rates vary

Sector multiples are up 3% since our previous report in May 2025, and 6% YoY. As a result, our fair value estimate increased from $12.85 to $12.98/share

We are reiterating our BUY rating, and adjusting our fair value estimate from $12.85 to $12.98/share, implying a potential return of 19% (including dividends) in the next 12 months. We believe Q2 results demonstrate resilience in mortgage receivables growth alongside continued easing in lending rates. While net income rose, and loan loss provisions remained stable, the notable increase in impaired mortgages warrants monitoring. Management’s disciplined focus on lower-risk property types and prudent underwriting should help navigate near-term market softness. Overall, with an improved sector outlook and stable dividend yield, we are maintaining a cautiously optimistic stance on AI.

Risks

Maintaining our risk rating of 3 (Average)

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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