• We believe the portfolio’s risk profile has decreased due to lower stage three mortgages, and higher first mortgages.
  • Atrium maintains its status as the highest-yielding, and the second largest publicly traded MIC, with a higher percentage of first mortgages, and lower average Loan-to-Value (LTV) mortgages. 
  • Net mortgages outstanding were down 1% QoQ to $867M. We believe transaction volumes will pick up in H2-2024, driven by lower interest rates.
  • Stage three (impaired) mortgages decreased by $16M QoQ, to 2.4% of mortgages (net). Despite the improvement, for conservatism, AI raised loan loss allowances by 30 bps QoQ, to 2.9% of mortgages (net). Both allowances and provisions were in line with our estimates. 
  • We are maintaining our 2024 dividend forecast of $1.10/share, reflecting a yield of 9.9%. Anticipating lower rates, we see potential for a rally in MIC/financial stocks in H2-2024.

Price and Volume (1-year)

 

  YTD 12M
AI 6% -4%
TSX 7% 10%

*See important disclosures at the bottom of this report rating and risk definitions. All figures in US$ unless otherwise specified.

 

Portfolio Update

Loan advancements were up 20% YoY; repayments were down 7% YoY. Net mortgages outstanding were down 1% QoQ to $867M 

Source: Company Data / FRC

Anticipating higher repayments in Q2, management expects a temporary decline in portfolio size. We believe transaction volumes will pick up in H2-2024, driven by lower interest rates

Source: Company Data / FRC

LTV and exposure to first mortgages increased. The average mortgage size and duration decreased. No material changes in exposure by property-type 

 

Increased exposure to ON. Stage three (impaired) mortgages decreased by $16M QoQ, to 2.4% of mortgages (net)

We are maintaining our forecast for 2024 loan loss provisions at $15M (Q1: $3.9M). In summary, we believe the portfolio’s risk profile has decreased due to lower stage three mortgages, and higher first mortgages

 

 

Financials

Q1-2024 revenue was up 6% YoY, amid higher lending rates, but missed our estimate by 1%. EPS was down 18% YoY, driven by higher loan loss provisions, but aligned with our estimate 

Source: Company / FRC

*The calculations in the above table are approximates as we used the average of beginning and end of period mortgages outstanding.

 

Annual regular dividends remained unchanged at $0.90/share. Debt to capital remained within historic levels (40%-45%) 

FRC Forecasts 

 

We are not making any material changes to our 2024 estimates

Our estimate for the 2024 dividend varies between $0.77 and $1.43/share, using various YoY increases in loan loss allowances 

 

Comparables Analysis and Valuation

Sector multiples are down 3% since our previous report in February 2024, and 26% below pre-pandemic levels.

Our fair value estimate decreased from $13.42 to $13.21/share due to lower sector multiples 

 

We are reiterating our BUY rating, and adjusting our fair value estimate from $13.42 to $13.21/share, implying a potential return of 28% (including dividends) in the next 12 months. Key risks include a softer mortgage origination market, and higher default rates. Anticipating lower interest rates, we foresee a potential rally in MIC/financial stocks in H2-2024. Although lower rates can compress profit margins, the resulting economic boost, and potential for higher valuations, will likely have a more significant positive impact.

 

Risks

We believe the company is exposed to the following risks: 

  • Diversification – over 70% 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

 

APPENDIX