Atrium Mortgage Investment Corporation
Atrium Mortgage Investment Corporation is widely recognized as Canada’s premier non-bank lender that provides creative financing solutions to the real estate communities in Ontario, Saskatchewan, Alberta and British Columbia that traditional financial institutions either cannot or will not service. Atrium’s objective is to provide investors with stable, safe, and reliable returns and to preserve capital.
The Canadian Business Journal recently spoke with Robert Goodall, President and CEO of Atrium Mortgage Investment Corporation about his company’s tremendous success in the marketplace. Prior to founding Atrium, Goodall worked with Royal Trust, which along with Canada Trust, were the two largest trust companies in the country. He comes from a long and successful career in the financial services industry, having led the mortgage lending operation at Royal Trust from 1990 to 1993, originally taking on the executive leadership role at the young age of 32.
Royal Trust had been in business for a century but the in the early to mid-1990s trust companies found themselves beaten up rather badly. In 1993 Goodall decided it was time to leave Royal Trust and branch out on his own.
“I formed a team and we did as much as $1 billion of brokerage work in the GTA. What we noticed was a lack of professionalism at that time between 1993 and 2001 in the private lending area, which is called non-banking today,” explains Goodall.
The constant frustration of attempting to arrange debt for projects that were of good quality but were not bank deals for a variety of reasons, Goodall formed a team in 2001 and opened a lending firm called Atrium. For the first 11 years the company was a private entity before going public five years ago. It started with 20 shareholders and $3.5 million in capital. By 2012 Atrium had grown to more than 600 shareholders and so Goodall believed it was the perfect time to go public.
“We went public in 2012 with roughly a $200 million portfolio and today it’s just under $550 million,” confirms Goodall.
The MIC Expansion
In the early days lenders were often just syndications put together by private individuals and there was only one publicly-traded MIC with a value of $22 million. Today, Atrium stands at just under $550 million and there are a couple of MICs that are approaching $1 billion, so the industry has blossomed well beyond what most people could have envisioned.
“It was really in an early stage of development and most of the trust companies had been shut down. There was an amazing opportunity – which remains today – to do high-quality business because of the limited number of financial institutions in Canada,” notes Goodall.
About 20 trust companies were lost in the early to mid-1990s and all that was essentially left was the six major banks with no trust companies of any significance at all. There was a huge void that came out of the early 1990s. It took a while to get going but the MICs are helping to fill that space.
Even back in 1993, if you added up all assets of the cumulative trust companies they would have been over $100 billion and today the MIC industry in Canada is still only about $10 billion so they have only replaced the trust companies in a small manner.
“The MIC business tends to be very good in Canada because you don’t have to compete against a myriad of lenders and banks,” adds Goodall.
Many mortgage providers are constrained by a lack of flexibility whereas Atrium MIC is nimble and is able to provide mortgages to quality borrowers where larger financial institutions do not offer competitive terms and structures. The investment objectives are to preserve Atrium’s shareholders’ equity and to provide them with stable and secure dividends from our investments in mortgage loans within the criteria mandated for a Mortgage Investment Corporation (MIC).
Goodall is of the opinion a substantive amount of the growth potential has already occurred but he believes there are still many more significant, sizable opportunities left to pursue. A MIC tends to bring together two primary features that investors most often seek, namely yield and real estate. There are also a number of things a MIC does that a bank either can’t or won’t get involved with.
“What’s attractive to the shareholder is the dividend yield,” explains Goodall. “A MIC is just like a real estate investment trust (REIT) in that it doesn’t pay tax at the corporate level. It’s different from a REIT in that its pre-tax income has to be distributed in entirety every year, so 100% of our profits are distributed.”
MIC vs REIT
A common question that comes up is how to determine the difference between a MIC and a REIT. Fundamentally MICs have a much higher yield than a REIT with the latter routinely distributing 75-90% of its income. Additionally, REITs don’t have the same level of income as MICs so the REIT is probably averaging 3.5% to 4.5% whereas a MIC averages 7% to 10% depending on what risk profile it’s chosen to focus upon.
Goodall and his executive team have set up Atrium in such a way that it tends to be on the lower risk spectrum of the MICs, routinely harvesting about an 8% yield to the company’s shareholders based on where the stock price is trading as of now. “Our average loan to value in the portfolio is only about 63%. What that means is that our borrowers on average have 37% equity into the deal,” he says.
Another immensely attractive feature about a MIC is that it’s a much more defensive play within a REIT because a REIT actually owns the real estate. If the real estate value declines by 20% the REIT loses 20% and by extension so do the shareholders. A MIC such as Atrium’s, which is only lending at 63% of value, is able to absorb a 15% to 20% loss in the market and incur virtually no losses. To further emphasize that point, during the peak of the 2008 and 2009 global financial crisis Atrium lost a sum total of zero whereas many real estate companies lost millions of dollars.
Goodall says Atrium hasn’t been viewed with the same excitement that the REITs have – up until now. But if one takes a pragmatic view of the real estate market reaching a point where it’s very expensive, which most people including developers would acknowledge, and the preference is to maintain that strong yield, the MICs are far a more attractive option.
“Atrium has been around for 15 years and we’ve never missed a dividend payment and our dividends have been anywhere from a low of about 8% to a high of more than 10% every single year. Many of our shareholders have been with us for more than a decade. They were with us when we were private and they stayed with us when we went public,” Goodall proudly says.
As Goodall points out, Atrium’s shareholders view it as a fixed income. There will never be a doubling of the share price the way a REIT may potentially accomplish in a hot real estate market but there is hardened proof that the MICs are much more stable and reliable. Instead of getting 1% or 2% on a government bond an investor can expect to see anywhere from a 7% to 9% return.
Mortgage Investment Corporations are governed by provincial regulators. The Financial Services Commission of Ontario regulates Atrium’s business services in Ontario but also because the company is public it is also regulated by the Ontario Securities Commission. Atrium has licences to operate in Ontario, Saskatchewan, Alberta and B.C.
Mortgage loan amounts are generally $300,000 to a maximum of $20 million. The largest single mortgage in Atrium’s mortgage portfolio as at December 30, 2016 was $27.5 million. For loan amounts in excess of $15 to $20 million, the company generally will co-lend with a financial institution or private lender.
Demographics and economic growth were large factors in Atrium setting up operations in Ontario and western Canada. It’s been a strategy from Day One to go after the larger urban centres. “We’ll probably never be open in the Maritimes because there’s just not the population there. We really like lending in the major cities; we don’t like lending in the smaller towns because if the market softens there is no liquidity for that real estate for a protracted period of time,” says Goodall.
In fact, the only major city Atrium does not have a presence is Montreal, and Goodall would certainly be open to the idea if he was able to find the right individual to spearhead the endeavour.
In addition to Goodall there are three other executive team members with more than 25 years of lending experience, all of whom have held positions of vice president or higher at a major financial institution. Atrium is quite unique in terms of our skillset within the MIC industry as most are private and very small and don’t have the level of expertise and experience.
Ontario provides just less than 70% of all of Atrium’s current business. Back in 2012 when the company went public it only had the one office in Toronto. Goodall wanted to wait to go public before hiring high-quality people that he could afford.
“Ontario has gone from having 100% of our business in 2012 down to 68% now. I think it will always be somewhere between 60% and 70%. If you looked at the banks’ portfolios, Ontario would be over 50%, without a doubt,” states Goodall.
Alberta does have the youngest median age average of any province in Canada so that is one factor that could bode well for the western province during its recovery from the downturn in the oil and gas sector.
“Our view is that the next 12 months in Alberta will be a recovery but largely a jobless recovery because I think companies are going to be very careful before they start hiring again. We’re between 20% and 25% in British Columbia while Alberta and Saskatchewan were under 10% but that number is expected to rise when those markets recover,” continues Goodall.
Atrium’s portfolio turns over between 40% and 50% per year. The average term is less than two years but often there’s a renewal process that follows. The reason terms don’t extend longer is due to the fact the average rate is anywhere between 7.5% and 8.5% according to Goodall. “If you want a high-quality borrower they will generally refinance us with bank debt within that two-year period. The banks know us very well because they are often replacing our debt. We tend to come in on transactions at an earlier stage of development in the major cities.”
MICs are able to fill a void that the large traditional banks can’t be bothered dealing with and there are literally thousands of these types of investment opportunities. An example comes from the nation’s capital with the Atrium board of directors having approved a retail project with apartments above it in downtown Ottawa.
“It was a $1.5 million loan, which the banks would have no interest in,” adds Goodall. “It’s not a high-risk loan. If it was a loan for 10 times the size, then the banks would have been interested but if you’re lending at prime plus 1%, there’s virtually no profit in it for the banks. That’s the great thing about the oligopoly of financial institutions in Canada. It leaves that type of high-quality business for us to take. It’s work-intensive for us, but that’s what we do.”
Another example of a project perfectly suited for a MIC that Atrium is working on is located near Yonge and Lawrence in Toronto. It’s a phenomenal location with apartments on site but is fairly low density. A financial institution was to have provided the acquisition financing but the time-frame was too tight. With about 10 days prior to an agreement the financial institution notified the purchaser that they wouldn’t be able to complete the $12.5 million transaction loan on time. That’s where Goodall and Atrium stepped in.
“All the appraisal reports and environment reports had been done so we knew everything was fine so we provided that loan within the 10 days. A financial institution has little to no chance of doing it in less than 60 to 90 days,” says Goodall. “Both of those loans are bank quality but for two different reasons they were unable to provide the financing.”
Atrium’s board of directors is comprised of seven individuals, but Goodall is the only senior management person on the board. Four of the six independent are major real estate investors in Canada. The board approves every deal valued at more than $1 million. The only reason the board doesn’t approve deals of less than $1 million is because house loans require unbelievably quick turnarounds.
The strategy at Atrium is to grow in a controlled manner by diversifying geographically, and focusing on those real estate sectors with the lowest risk profiles. The investment objectives are to preserve shareholders’ equity and to provide stable and secure dividends from investments in mortgage loans within the criteria mandated for a Mortgage Investment Corporation (MIC). When Goodall was first assembling his team, he surrounded himself by experienced people like himself. It’s often said that the success of any enterprise begins with the employees.
“A big part of our success is due to the management team,” he emphatically states. “We have eight senior people, and seven of them have more than 10 years of lending experience and as I previously mentioned four of the eight have more than 25 years. We have a depth of management team that is unique within the MIC market.”
The philosophy at Atrium is that they don’t see growth as the be-all and end-all but rather view the consistency of the dividends as the most important factor. Goodall will always look to business prospects that he believes will get the company repaid and consequently put Atrium in a position where it can provide dividends to its shareholders.
“We view ourselves as a hybrid between a stock and a bond but I think if we had to choose between the two we’re really a fixed-income instrument. Our earnings have gone up consistently since we went public and we’ve raised the monthly dividend,” he says.
To this day the vast majority of MICs are quite small whereas Atrium is much more diversified geographically and by real estate sector. There is an old saying that you should never put all your eggs in one basket, and it’s something Goodall is always mindful of in his approach to finance. “Our record speaks for itself. Fifteen years of uninterrupted dividends through good markets and bad is something we’re very proud about.”