On today’s TSX Breakouts report, there are 38 stocks on the positive breakouts list (stocks with positive price momentum), and 28 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that appeared on the positive breakouts list earlier this week with its share price closing at an all-time high on Monday - Atrium Mortgage Investment Corp. (AI-T).
Strong industry fundamentals provide a solid foundation for the company to continue to deliver solid revenues and maintain its attractive dividend. The company pays its shareholders a monthly dividend with a current annualized yield of 6.45 per cent. Year-to-date, the share price is up 11 per cent. Further share price gains may be slow given the security’s high valuation.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The MIC (Mortgage Investment Corporation)
Toronto-based Atrium Mortgage Investment Corp. is a mortgage lender that specializes in providing loans outside of the traditional bank lending environment. Loan terms are short, generally one or two-years in length, allowing Atrium to adjust rates within their loan portfolio more frequently.
Loans are offered at annual interest rates largely between 7.75 per cent and 10 per cent. The weighted average interest rate on the mortgage portfolio was 8.8 per cent as at Sept. 30. Atrium provides financing on a variety of properties such as residential, commercial, and development projects. Its mortgage portfolio is comprised mostly of first mortgages, representing 85.4 per cent. At the end of the third-quarter, the weighted average LTV (loan-to-value) ratio stood at 61 per cent.
In terms of geographical exposures, as at Sept. 30, the majority of underlying properties were focused in the Greater Toronto Area, representing 67.1 per cent of Atrium’s mortgage portfolio, followed by the Greater Vancouver Area that accounted for 27.5 per cent of the total mortgage portfolio.
After the market closed on Oct. 31, Atrium reported solid third-quarter financial results.
Revenues were $16.7-million, up 8 per cent year-over-year driven by a larger mortgage portfolio and higher interest rates. Earnings per share came in at 25 cents. Atrium’s mortgage portfolio expanded to $739.5-million, up 4 per cent sequentially. Year-to-date, the company has realized net income of $28.8-million and paid $26.4-million in dividends to its shareholders.
The following trading day, the share price advanced 1 per cent.
As at Sept. 30, the company had five loans in default, one was repaid after quarter-end, another is expected to be repaid in late November, and the remaining three loans are not anticipated to result in losses.
On the earnings call, the chairman Mark Silver remarked on the persistence of positive market fundamentals in the Greater Toronto Area, “The Toronto office sector remained very strong in Q3 (third-quarter). The downtown vacancy rate dropped a further 30 basis points (0.3 per cent) to 2.3 per cent reflective of the lowest downtown vacancy rate in North America. Strong competition for space in Toronto’s core drove rental rates to new highs. The Toronto suburban office market, which has historically been weaker, also saw an 80 basis point decrease in the vacancy rate to 11.9 per cent. The industrial market in the GTA also remains fairly competitive.”
He added, “Upward pressure on rental rate is expected to persist in 2019 and 2020 as demand is forecast to remain very strong. And the apartment vacancy rate in Toronto remains very tight at 1.1 per cent with rent increases well above the rate of inflation.” The Toronto housing market is strengthening. He noted that in September, “The average price of attached homes in the GTA increased by 4.1 per cent on a year-over-year basis, while semi-detached homes and townhouses increased by 5.1 per cent and 6.8 per cent, respectively. Condo apartment resale prices have increased by 4.2 per cent.”
Turning to the Greater Vancouver Area, which is the company’s second largest exposure, Mr. Silver said, “The Vancouver office market has strong leasing performance… [The] current vacancy rate of 4.3 per cent is a 40 basis point reduction over the last quarter and represents a record low.” With respect to the housing market in the GVA, he said, “The general consensus is that the market has reached a bottom. The sales increases occurred across all housing types.”
In October, Atrium completed two offerings, a $17-million public offering (issuing 1,288,000 shares at $13.40 per share) and a $10-million private placement (issuing 746,200 shares at a price of $13.40 per share) with proceeds earmarked to fund future mortgage loans.
Mr. Silver mentioned on the earning call, “We have a strong pipeline for Q4 (fourth-quarter) with between $65-million and $70-million of approved loans in closing.”
Dividend policy
Atrium pays its shareholders a monthly dividend of 7.5 cents per share, or 90 cents per share yearly. This equates to an annualized dividend yield of 6.45 per cent. Atrium has maintained its monthly dividend at this level since early 2018.
As a mortgage investment corporation, Atrium does not pay corporate tax on earnings. Instead, its earnings are distributed to shareholders as interest income and taxed accordingly. Consequently, Atrium pays a special dividend each year to its shareholders in order to maintain its status as a MIC. In Dec. 2018 and Dec. 2017, Atrium announced special dividends of 4 cents per share each year to its shareholders.
Analysts’ recommendations
This small-cap stock with a market capitalization of $580-million is covered by three analysts on the Street.
Stephane Boire, an analyst at Echelon Wealth Partners, has a “buy” recommendation. TD Securities’ Graham Ryding has a “hold” recommendation, a call that he has maintained since he initiated coverage on Atrium in August 2015. Fundamental Research’s Sid Rajeev also has a “hold” recommendation.
Revised recommendations
Earlier this month, Mr. Boire lifted his target price to $14.50 (the high on the Street) from $14.
In October, Mr. Ryding increased his target price to $14 from $13.50.
Financial forecasts
The Street is forecasting earnings per share of 97 cents in 2019 and holding at this level for 2020. Looking back, reported earnings per share came in at 94 cents in 2018, 94 cents in 2017, 95 cents in 2016, 93 cents in 2015, and 91 cents in 2014.
In recent months, earnings forecasts have held steady for 2019, while expectations have decreased for the following year (with dilution form the recent financings). For instance, three months ago, the consensus earnings per share estimates were 97 cents for 2019 and 99 cents for 2020.
Valuation
The stock is trading at a price-to-earnings multiple of 14.3 times the 2020 consensus estimate, above its three-year historical average of 12.7 times and near peak levels. According to Refinitiv, the stock is trading at a price-to-book ratio of 1.3 times.
Industry peer Firm Capital Mortgage Investment Corporation (FC-T) is trading at a forward P/E multiple of 14.4 times the consensus 2020 estimate, and at a price-to-book of 1.3 times, according to Refinitiv. MCAN Mortgage Corp. (MKP-T), another mortgage lending peer, is trading at a forward P/E multiple of 11.7 times, and price-to-book of 1.2 times.
The average 12-month target price is $14.20, suggesting the security is nearly fully valued at current levels.
Insider Transaction Activity
Year-to-date, there has been selling activity in the public market reported by two insiders.
Between Feb. 19 and Aug. 7, director Nancy Lockhart sold a total of 7,000 shares at an average price per share of approximately $13.37 for an account in which she has control or direction over (The Murray Frum Foundation), leaving 64,100 shares in this account.
Between June 12 and June 18, chairman of the board Mark Silver divested a total of 137,850 shares at an average price per share of roughly $13.51 for an account in which he has indirect ownership (1513549 Ontario Limited) with 100,000 shares remaining in this account.
Chart watch
On Monday, the share price closed at $14.02 - a record high.
Year-to-date, the share price has increased 11 per cent.
Peers MCAN Mortgage Corp. (MKP-T) and Firm Capital Mortgage Investment Corp. (FC-T), are up 25 per cent and 12 per cent, respectively.
Since mid-2018, the share price has traded largely between $13 and $14. Looking at key resistance and support levels, the next major ceiling of resistance is around $14. After that, there is overhead resistance around $14.50. Looking at the downside, there is strong technical support around $13.50, near its 200-day moving average (at $13.54). Failing that, there is solid support around $13.
This small-cap security can be thinly traded. The three-month historical daily average trading volume is approximately 58,000 shares.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty