Atrium Mortgage Investment
Annual Report 2023

Plain-text annual report

(cid:36)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:87)(cid:3) (cid:21)(cid:19)(cid:21)(cid:22) (cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:15)(cid:3)(cid:21)(cid:19)(cid:21)(cid:22) (cid:38)(cid:36)(cid:49)(cid:36)(cid:39)(cid:36)(cid:351)(cid:54)(cid:54)(cid:3)(cid:51)(cid:53)(cid:40)(cid:48)(cid:44)(cid:40)(cid:53)(cid:53)(cid:3)(cid:49)(cid:50)(cid:49)(cid:16)(cid:37)(cid:36)(cid:49)(cid:46)(cid:46)(cid:3)(cid:47)(cid:40)(cid:49)(cid:39)(cid:40)(cid:53)(cid:382) Table of Contents 1 5 21 49 Earnings Press Release Management’s Discussion and Analysis(cid:1) Consolidated Financial Statements(cid:1) Corporate Directory About Atrium Mortgage Investment Corporation Safety - Consistency - Yield Atrium lends in major urban centres and where the stability and liquidity of real estate is high. As a mortgage lender, we fill the lending gap that results from the limited number of financial institutions operating in Canada. Our loan portfolio is high quality but we are able to charge higher rates than the banks because we offer flexibility, creativity and excellent service. Our mortgages are secured by and commercial real estate property located in Canada, and must all be in strict compliance with our investment policies. Atrium has a 22-year record of success and track consistency in achieving our strategic objectives: to grow in a controlled manner by focusing on real estate sectors with the lowest risk profiles. residential, multi-residential types of all Since commencing operations in 2001, our investment objectives have been to preserve our shareholders' equity and provide our shareholders with stable and secure dividends from our investments in mortgage loans within the criteria permitted Investment Corporation (MIC). Working within conservative risk parameters, we endeavour income and dividends through careful underwriting and efficient management of our mortgage investments. for a Mortgage to maximize We were listed on the Toronto Stock Exchange in 2012. Our regular dividend is paid monthly, currently at a rate of $0.075 per share per month. Our dividends since 2018 are as follows: Year 2018 2019 2020 2021 2022 2023 2024 Regular dividend Special dividend Total dividends paid(cid:1) Earnings per share (basic) $0.90 $0.90 $0.90 $0.90 $0.90 $0.90 $0.90 $0.04 $0.06 $0.02 $0.07 $0.23(cid:1) $0.29 To be determined $0.94 $0.96 $0.92 $0.97 $1.13 $1.19 $0.95 $0.97 $0.93 $0.98 $1.08 $1.18 FOR IMMEDIATE RELEASE ATRIUM MORTGAGE INVESTMENT CORPORATION ANNOUNCES HIGHEST ANNUAL NET INCOME IN ITS HISTORY AND A RECORD SPECIAL DIVIDEND TORONTO: February 15, 2024 – Atrium Mortgage Investment Corporation (TSX: AI, AI.DB.C, AI.DB.D, AI.DB.E, AI.DB.F, AI.DB.G) today released its financial results for the year ended December 31, 2023. Highlights  Record annual basic and diluted earnings per share of $1.18 and $1.14, respectively, compared to $1.08 and $1.06 basic and diluted per share in 2022  Record net income of $51.5 million, up 11.1% from prior year  Record gross mortgage portfolio of $893.6 million, a 3.2% increase over prior year  Record $0.29 per share special dividend to shareholders of record on December 29, 2023  Prudent allowance for mortgages losses of 2.53% on the gross mortgage portfolio  High quality mortgage portfolio o 94.6% of portfolio in first mortgages o 94.0% of portfolio is less than 75% loan to value o average loan-to-value is 61.4% “2023 proved to be an exceptional year for Atrium and its shareholders. The business posted record earnings per share of $1.18, and an outsized special dividend of $0.29 per share. These results were achieved amid one of the most challenging real estate markets since the early 1990s. In 2023, we managed to capitalize on high quality opportunities arising from reduced activity by institutional lenders, while still maintaining a conservative portfolio loan-to-value of 61.4% and increasing our percentage of first mortgages to 94.6%. Our total allowance for mortgage losses of 253 bps reflects a proactive approach of recognizing increased credit risk in these uncertain economic conditions. We are hopeful that market conditions will improve in the latter half of 2024 but remain prepared to navigate through the current cycle with ample liquidity and tight risk parameters. Lastly, I am pleased to announce that Richard Munroe, Chief Operating Officer, has been appointed to the role of President and Chief Operating Officer. This promotion recognizes Richard’s increased role and importance at Atrium and positions the company to prosper for many years to come. I will continue to act as CEO for the foreseeable future and will remain fully engaged in the business.” said Rob Goodall, CEO of Atrium. 1 Conference call Interested parties are invited to participate in a conference call with management on Friday, February 16, 2024 at 9:00 a.m. ET to discuss the results. To participate or listen to the conference call live, please call 1- 833-491-0507 (call topic: Fourth quarter results). For a replay of the conference call (available until February 28, 2024) please call 1-833-607-0619, password 9177343 #. Results of operations For the year ended December 31, 2023, Atrium reported record assets of $877.9 million, up from $874.8 million at the end of 2022. Revenues were $98.6 million, an increase of 25.8% from the prior year. Net income for 2023 was $51.5 million, an increase of 11.1% from the prior year. Atrium’s allowance for mortgage losses at December 31, 2023 totaled $22.6 million or 2.53% of the gross mortgage portfolio. Basic and diluted earnings per common share were $1.18 and $1.14, respectively, for the year ended December 31, 2023, compared with $1.08 and $1.06 basic and diluted earnings per common share in the prior year, an increase of 9.3% (basic). Basic and diluted earnings per common share were $0.27 and $0.26, respectively, for the fourth quarter compared to $0.31 and $0.30 basic and diluted in the comparative quarter. The board of directors declared a special dividend of $0.29 for 2023, resulting in a total dividend of $1.19 per common share paid to shareholders for the year, compared to $1.13 for the prior year. Mortgages receivable as at December 31, 2023 was a record $876.7 million, up from $860.4 million as at December 31, 2022. During the year ended December 31, 2023, $281.5 million of mortgage principal was advanced and $263.6 million was repaid. The weighted average interest rate on the mortgage portfolio at December 31, 2023 was 11.42%, compared to 10.77% at December 31, 2022. Financial summary Consolidated Statements of Income and Comprehensive Income (000s, except per share amounts) Year ended December 31 2023 Year ended December 31 2022 Year ended December 31 2021 Revenue Mortgage servicing and management fees Other expenses Impairment loss on investment property held for sale Recovery of prior mortgage losses Provision for mortgage losses Income before financing costs Financing costs Net income and comprehensive income Basic earnings per share Diluted earnings per share Dividends declared Mortgages receivable, end of year Total assets, end of year Shareholders’ equity, end of year Book value per share, end of year 2 $ $ $ $ $ 98,574 (8,465) (1,299) − 492 (11,894) 77,408 (25,923) 51,485 1.18 1.14 52,095 $ $ $ $ $ $ 78,371 (8,526) (1,098) (1,832) 1,050 (1,914) 66,051 (19,719) 46,332 $ 1.08 1.06 $ $ 64,235 (7,241) (1,382) − − (1,289) 54,323 (12,530) 41,793 0.98 0.98 48,736 $ 41,346 $ $ $ $ $ $ $ $ $ $ 10.97 $ 10.97 $ 876,733 877,877 482,206 860,374 874,780 475,564 759,225 775,487 470,167 10.98 Analysis of mortgage portfolio Property Type (outstanding amounts in 000s) High-rise residential Mid-rise residential Low-rise residential House and apartment Condominium corporation Residential portfolio Commercial Mortgage portfolio As at December 31, 2023 Outstanding amount % of Portfolio Number As at December 31, 2022 Outstanding amount % of Portfolio Number 22 25 14 153 10 224 19 243 $ $ 323,340 208,289 153,561 117,943 1,786 804,919 88,640 893,559 36.2% 23.3% 17.2% 13.2% 0.2% 90.1% 9.9% 100.0% 20 30 14 158 12 234 26 260 $ $ 300,989 225,281 128,244 108,124 2,189 764,827 101,435 866,262 34.7% 26.0% 14.8% 12.5% 0.3% 88.3% 11.7% 100.0% Number of Location of underlying property mortgages (outstanding amounts in 000s) Greater Toronto Area Non-GTA Ontario British Columbia Alberta 166 52 24 1 243 Number of Location of underlying property mortgages (outstanding amounts in 000s) Greater Toronto Area Non-GTA Ontario British Columbia Alberta 169 61 28 2 260 As at December 31, 2023 Outstanding amount Percentage outstanding Weighted average loan to value Weighted average interest rate 653,401 40,753 191,955 7,450 893,559 73.1% 4.6% 21.5% 0.8% 100.0% 61.4% 64.6% 60.6% 71.0% 61.4% 11.63% 9.81% 10.95% 14.00% 11.42% As at December 31, 2022 Outstanding amount Percentage outstanding Weighted average loan to value Weighted average interest rate 598,207 38,950 220,727 8,378 866,262 69.0% 4.5% 25.5% 1.0% 100.0% 59.7% 68.7% 56.4% 71.2% 59.4% 11.04% 8.25% 10.41% 12.55% 10.77% $ $ $ $ For further information on the financial results, and further analysis of the company’s mortgage portfolio, please refer to Atrium’s consolidated financial statements and its management’s discussion and analysis for the year ended December 31, 2023, available on SEDAR+ at www.sedarplus.ca, and on the company’s website at www.atriummic.com. Appointment to President and Chief Operating Officer Atrium is pleased to announced that Richard Munroe, Chief Operating Officer, has been appointed to the role of President and Chief Operating Officer, effective February 15, 2024. Richard joined Atrium in September 2006 and was most recently appointed Chief Operating Officer in February 2022. Prior to that appointment, Richard held the title of Managing Director, Ontario. He brings over 18 years of experience sourcing and managing mortgage investments. 3 About Atrium Canada’s Premier Non-Bank Lender™ Atrium is a non-bank provider of residential and commercial mortgages that lends in major urban centres in Canada where the stability and liquidity of real estate are high. Atrium’s objectives are to provide its shareholders with stable and secure dividends and preserve shareholders’ equity by lending within conservative risk parameters. Atrium is a Mortgage Investment Corporation (MIC) as defined in the Canada Income Tax Act, so is not taxed on income provided that its taxable income is paid to its shareholders in the form of dividends within 90 days after December 31 each year. Such dividends are generally treated by shareholders as interest income, so that each shareholder is in the same position as if the mortgage investments made by the company had been made directly by the shareholder. For further information about Atrium, please refer to regulatory filings available at www.sedarplus.ca or investor information on Atrium’s website at www.atriummic.com. For additional information, please contact Robert G. Goodall Chief Executive Officer John Ahmad Chief Financial Officer (416) 867-1053 info@atriummic.com www.atriummic.com 4 (cid:48)(cid:39)(cid:9)(cid:36) (cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:10)(cid:86)(cid:3) (cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86) (cid:60)(cid:72)(cid:68)(cid:85)(cid:85)(cid:3)(cid:40)(cid:81)(cid:71)(cid:72)(cid:71) (cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:15)(cid:3)(cid:21)(cid:19)(cid:21)(cid:22) (cid:38)(cid:36)(cid:49)(cid:36)(cid:39)(cid:36)(cid:351)(cid:54)(cid:54)(cid:3)(cid:51)(cid:53)(cid:40)(cid:48)(cid:44)(cid:40)(cid:53)(cid:53)(cid:3)(cid:49)(cid:50)(cid:49)(cid:16)(cid:37)(cid:36)(cid:49)(cid:46)(cid:46)(cid:3)(cid:47)(cid:40)(cid:49)(cid:39)(cid:40)(cid:53)(cid:382) 6 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis December 31, 2023 Our business Atrium is a mortgage lender filling the lending gap that results from the limited number of financial institutions operating in Canada. We lend in major urban centres and where the stability and liquidity of real estate are high. Our loan portfolio is high quality but we are able to charge higher rates than the banks because we offer flexibility, creativity and excellent service. Our mortgages are secured by all types of residential, multi-residential and commercial real estate located in Canada, and must all be in strict compliance with our investment policies. Atrium has a 22-year track record of success and consistency in achieving our strategic objectives: to grow in a controlled manner by focusing on real estate sectors with the lowest risk profiles. Our objective is to invest in a diverse portfolio of predominantly first mortgages that are relatively short-term, to provide our shareholders with stable and secure dividends while preserving shareholders’ equity, all within the parameters mandated for a Mortgage Investment Corporation (MIC). Working within conservative risk parameters, we endeavour to maximize income and dividends through careful underwriting and efficient management of our mortgage investments. Information herein is current as of February 15, 2024. Highlights Atrium continues to demonstrate strength and stability. For the year ended December 31, 2023, we had revenues of $98.6 million compared to $78.4 million in the prior year, an increase of 25.8%. Net income was $51.5 million compared with $46.3 million in the prior year, an increase of 11.1%. Basic and diluted earnings per share were $1.18 and $1.14, respectively, compared with $1.08 and $1.06 basic and diluted earnings per share in the prior year, an increase of 9.3% basic and 7.5% diluted. We declared a regular dividend of $0.075 per share for each month in the year, a total of $0.90 for 2023, consistent with dividends of $0.90 for the prior year. In addition, we declared a special dividend of $0.29, for a total dividend of $1.19 for 2023, compared to $1.13 for the previous year. For 2024, our board of directors has set the regular dividend rate at $0.90 per annum. Our regular and special dividends for the past five years are as follows: Year 2019 2020 2021 2022 2023 2024 Regular dividend $0.90 $0.90 $0.90 $0.90 $0.90 $0.90 Special dividend $0.06 $0.02 $0.07 $0.23 $0.29 to be determined Total dividends paid $0.96 $0.92 $0.97 $1.131 $1.191 to be determined Earnings per share (basic) $0.97 $0.93 $0.98 $1.08 $1.18 to be determined 1) The difference between dividends paid and earnings per share is largely due to a timing difference created by an impairment and provision for accounting that is excluded from the calculation of taxable income. We had $876.7 million of mortgages receivable as at December 31, 2023, an increase of 1.9% from December 31, 2022. During the year, $281.5 million of mortgage principal was advanced and $263.6 million was repaid. The portfolio has a weighted average remaining term of 9.2 months. Our focus continues to be lending in the major metropolitan areas of Ontario and British Columbia. Revenues of $98.6 million, increase of 25.8% over prior year Earnings per share $1.18 basic and $1.14 diluted Strong, high quality mortgage portfolio 94.6% first mortgages 94.0% less than 75% loan-to-value Mortgages receivable $876.7 million, up 1.9% from prior year We focus on first mortgages with high liquidity and low loan-to-value ratios MANAGEMENT’S DISCUSSION AND ANALYSIS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 7 Investment portfolio Our mortgage portfolio consisted of 243 mortgage loans and aggregated $893.6 million at December 31, 2023, an increase of 3.2% from December 31, 2022. Property Type (outstanding amounts in 000s) High-rise residential1 Mid-rise residential1 Low-rise residential1 House and apartment2 Condominium corporation3 Residential portfolio Commercial 4 Mortgage portfolio Accrued interest receivable Mortgage discount Unamortized origination fees Allowance for mortgage losses Mortgages receivable As at December 31, 2023 As at December 31, 2022 Outstanding % of Outstanding % of Number amount Portfolio Number amount Portfolio 36.2% 23.3% 17.2% 13.2% 0.2% 90.1% 9.9% 100.0% 20 30 14 158 12 234 26 260 22 25 14 153 10 224 19 243 $ 323,340 208,289 153,561 117,943 1,786 804,919 88,640 893,559 6,049 (68) (207) (22,600) $ 876,733 34.7% 26.0% 14.8% 12.5% 0.3% 88.3% 11.7% 100.0% $ 300,989 225,281 128,244 108,124 2,189 764,827 101,435 866,262 5,418 (94) (506) (10,706) $ 860,374 1) Mortgage loans on properties where the near-term business plan, as vetted by the lender, is to intensify the property into low-rise residential (detached, semi-detached, townhomes and/or multi-unit residential buildings up to 4 storeys), mid-rise residential (multi- unit residential buildings from 5-20 storeys and stacked townhomes) or high-rise residential (multi-unit residential buildings over 20 storeys). 2) Mortgage loans on existing single-family or multi-family residential homes and apartment buildings. 3) Mortgage loans to residential condominium corporations for guest suites, superintendent suites and green loans. 4) Mortgage loans on properties where the existing real estate is currently, or the proposed development project after rezoning will be mixed use, commercial or industrial. A summary of our mortgages by loan type is presented below. Loan type (outstanding amounts in 000s) Term loans Construction loans As at December 31, 2023 As at December 31, 2022 Outstanding % of Outstanding % of Number amount Portfolio Number amount Portfolio 237 6 243 $ 853,654 39,905 $ 893,559 95.5% 4.5% 100.0% 252 8 260 $ 809,722 56,540 $ 866,262 93.5% 6.5% 100.0% A summary of our mortgages by size is presented below. Mortgage amount (outstanding amounts in 000s) $0 - $2,500,000 $2,500,001 - $5,000,000 $5,000,001 - $7,500,000 $7,500,001 - $10,000,000 $10,000,001 + As at December 31, 2023 As at December 31, 2022 Outstanding % of Outstanding % of Number amount Portfolio Number amount Portfolio 169 19 17 8 30 243 $ 109,873 72,477 104,924 69,035 537,250 $ 893,559 12.3% 8.1% 11.8% 7.7% 60.1% 100.0% 182 26 19 7 26 260 $ 121,213 101,884 118,391 58,103 466,671 $ 866,262 14.0% 11.8% 13.6% 6.7% 53.9% 100.0% As of December 31, 2023, the average outstanding mortgage balance was $3.7 million (December 31, 2022 – $3.3 million), and the median outstanding mortgage balance was $0.7 million (December 31, 2022 – $0.8 million). The tables below show our mortgage portfolio by location of the underlying property and type of mortgage. The weighted average interest rates shown exclude the lender fees paid by the borrower, which reflect the yield to Atrium. As at December 31, 2023, 89.8% of our portfolio was priced at floating rates, the majority with rate floors, up from 75.4% at December 31, 2022. 8 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • MANAGEMENT’S DISCUSSION AND ANALYSIS Location of underlying property (outstanding amounts in 000s) Greater Toronto Area Non-GTA Ontario British Columbia Alberta Location of underlying property (outstanding amounts in 000s) Greater Toronto Area Non-GTA Ontario British Columbia Alberta As at December 31, 2023 Number of mortgages Outstanding amount Percentage outstanding Weighted average loan to value Weighted average interest rate 166 52 24 1 243 $ 653,401 40,753 191,955 7,450 $ 893,559 73.1% 4.6% 21.5% 0.8% 100.0% 61.4% 64.6% 60.6% 71.0% 61.4% 11.63% 9.81% 10.95% 14.00% 11.42% As at December 31, 2022 Number of mortgages Outstanding amount Percentage outstanding Weighted average loan to value Weighted average interest rate 169 61 28 2 260 $ 598,207 38,950 220,727 8,378 $ 866,262 69.0% 4.5% 25.5% 1.0% 100.0% 59.7% 68.7% 56.4% 71.2% 59.4% 11.04% 8.25% 10.41% 12.55% 10.77% We have an exceptionally high proportion of our portfolio invested in first mortgages (94.6%), which is one of our core strategies. As at December 31, 2023, the weighted average loan-to-value ratio in our mortgage portfolio was 61.4%, with 94.0% of the portfolio below 75% loan-to-value (At December 31, 2022, the weighted average loan-to-value ratio in our mortgage portfolio was 59.4%, with 97.1% of the portfolio below 75% loan-to-value.). Type of mortgage (outstanding amounts in 000s) First mortgages Conventional Non-Conventional Other Second and third mortgages Conventional Non-conventional Type of mortgage (outstanding amounts in 000s) First mortgages Conventional Non-Conventional Other Second and third mortgages Conventional Non-conventional As at December 31, 2023 Number of Outstanding amount mortgages Weighted Percentage average outstanding interest rate 209 16 10 235 6 2 8 243 $ 801,323 42,367 1,786 845,476 37,008 11,075 48,083 $ 893,559 89.7% 4.7% 0.2% 94.6% 11.40% 11.58% 7.43% 11.40% 4.1% 1.3% 5.4% 100.0% 12.11% 10.84% 11.81% 11.42% As at December 31, 2022 Number of Outstanding amount mortgages Weighted Percentage average outstanding interest rate 229 8 12 249 10 1 11 260 $ 780,133 18,956 2,189 801,278 57,624 7,360 64,984 $ 866,262 90.1% 2.1% 0.3% 92.5% 10.74% 10.49% 7.48% 10.72% 6.7% 0.8% 7.5% 100.0% 11.61% 9.50% 11.37% 10.77% MANAGEMENT’S DISCUSSION AND ANALYSIS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 9 Conventional mortgages are those with a loan-to-value of less than or equal to 75%, which is the industry standard for determining that a mortgage is conventional. Non-conventional mortgages have a loan-to-value in excess of 75%. The weighted average term remaining for our mortgage portfolio at December 31, 2023 is 9.2 months (December 31, 2022 – 10.9 months). Our business In Canada there is a lending gap due to the limited number of financial institutions operating. Our business is to help fill that gap by focusing on loans that cannot be placed with larger financial institutions but represent an acceptable underwriting risk. Our borrowers benefit from our efficient, thorough and fast underwriting process. We lend in major urban centres where the stability and liquidity of real estate are at the highest levels. Our policy is that the weighted average loan-to-value ratio of our mortgage portfolio, as a whole, at the time of underwriting each loan in our portfolio, will not exceed 75%. At December 31, 2023, the weighted average loan-to- value ratio of the mortgage portfolio was considerably lower than that, at 61.4%, compared to 59.4% at December 31, 2022. A typical loan in our portfolio has an interest rate of 8.49% to 14.00% per annum, a one or two-year term and monthly interest-only mortgage payments. Pricing on new loans during the fourth quarter typically ranged between 9.49% to 10.70%. Our lending parameters are as follows: • • • • • Mortgages on residential and commercial properties up to a maximum of 75% of appraised value. Loans on single family residences up to 75% of appraised value. Mortgages on income-producing real estate up to a maximum of 85% of appraised value. Construction loans up to a maximum of 90% of cost. Loans to condominium corporations. Mortgage loan amounts are generally $300,000 to $30 million. The largest single mortgage in our mortgage portfolio as at December 31, 2023 was $48.1 million (December 31, 2022 – $44.8 million). Our investment policies, which may be changed by our board of directors (“board”), are as follows: • • • • • • • • • • • • • We may invest only in residential mortgages, commercial mortgages, commercial mortgage backed securities and certain related investments. All investments must be mortgages on the security of real property situated within Canada, loans to condominium corporations, or certain permitted interim investments. Commercial mortgages may not constitute more than 50% of our total assets at any time. The term of the mortgage may generally be no greater than ten years. Mortgages are subject to the following geographic limits at the time of funding: Alberta – maximum 15% of total mortgages; British Columbia – maximum of 45% of total mortgages. No single borrower may account for more than 15% of our total assets. All mortgages are supported by external appraisals by a qualified appraiser. All mortgages, except mortgages secured by one to six residential units, are also supported by environmental audits. The maximum initial loan-to-value ratio of an individual mortgage is 85% including any prior ranking encumbrances, and the weighted average loan-to-value ratio of our mortgage portfolio at the time of underwriting each loan may not exceed 75%. Maintain a debt to total assets ratio of not more than 0.55:1.00. We do not invest directly in real property, although real property may be acquired by foreclosing on a mortgage. A mortgage investment of: (i) $4,000,000 or more requires approval of the board; (ii) between $2,000,000 and $4,000,000 requires approval of three members of the board, including at least two independent directors; and (iii) $2,000,000 or less requires approval of any one member of the board. For loans previously approved, the approval of one member of the board is required (i) for changes to the loan that do not exceed the approved amount by more than the greater of (a) $200,000 or (b) 2% of the previously approved loan amount; or (ii) for minor technical amendments that do not change other underwriting considerations, provided in all cases that the loan to value ratio increases by less than 5% and the ratio is 75% or less. We may invest in interim investments that are guaranteed by the Government of Canada or of a province or territory of Canada or deposits or certificates of deposits, acceptances and other similar instruments issued, endorsed or guaranteed by a Schedule I Bank in any amount without prior board approval. We may not make unsecured loans to, nor invest in securities issued by, our manager or its affiliates, nor make unsecured loans to the directors or officers of the manager. We may not make any investment, or incur any indebtedness, that would result in our not qualifying as a MIC. 10 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • MANAGEMENT’S DISCUSSION AND ANALYSIS Our objective is to invest in a diverse portfolio of predominantly first mortgages that are relatively short-term, to provide our shareholders with stable and secure dividends while preserving shareholders’ equity, all within the parameters mandated for a MIC. Working within conservative risk parameters, we endeavour to maximize income and dividends through the sourcing and efficient management of our mortgage investments. We are a non-bank lender and invest in mortgages secured by all types of residential, multi-residential and commercial real property located in Canada, subject to compliance with our investment policies. The types of properties that we finance include residential houses, small multi-family residential properties comprised of six or fewer units, residential apartment buildings, commercial properties and store-front retail properties, commercial properties and residential and commercial land development sites. We also finance construction projects and provide short-term bridge financing for real estate developers. Our strategy is to grow in a controlled manner by diversifying geographically, and focusing on real estate sectors with the lowest risk profiles. For larger loan amounts, we generally co-lend with a financial institution or private lender. We qualify as a MIC and are restricted from any activity that would result in us failing to qualify as a MIC. In order to qualify as a MIC, we must satisfy the requirements in subsection 130.1(6) of the Income Tax Act (Canada) (ITA) throughout the taxation year. Among the requirements are: • • • • • • We can only invest or manage funds and cannot manage or develop real property. We cannot own debts secured on real property situated outside Canada, debts owing by non-residents unless such debts were secured on real property situated in Canada, shares of the capital stock of corporations not resident in Canada, or real property situated outside of Canada or any leasehold interest in such property. No shareholder (together with related persons, as defined in the ITA) may at any time own, directly or indirectly, more than 25% of our common shares. The cost for tax purposes of cash on hand, debts secured on specified residential properties, and funds on deposit with a Canada Deposit Insurance Fund or Régie de l’assurance-dépôts du Québec-insured institution or credit union must constitute at least 50% of the cost of all of our property. The cost for tax purposes of any interests in real property (including leaseholds but excepting real or immovable property acquired by foreclosure after default by the mortgagor) may not exceed 25% of the cost of all of our property. There are certain restrictions as to our maximum debt-to-equity ratio. We are managed by Canadian Mortgage Capital Corporation (the “manager” or “CMCC”), which is our exclusive manager and arranges and services our mortgage loans and otherwise directs our affairs and manages our business. For explanations as to some of the terms used herein, please refer to our Annual Information Form for the year ended December 31, 2023, which is available at www.sedarplus.ca. Recent Developments Atrium generated earnings per share (EPS) of $0.27 in the fourth quarter and a record EPS of $1.18 for fiscal year 2023. This performance was underpinned by a record high mortgage portfolio balance, high mortgage portfolio rate, and disciplined approach to operating expenses. Atrium produced strong returns for shareholders despite increasingly challenging real estate market conditions that intensified throughout the year. High inflation and rising interest rates resulted in an economic slowdown which translated into less capital deployment into real estate developments and increased stress on borrowers. This also resulted in a prudent increase in the allowance for mortgage losses in the year to reflect higher credit risk from current market conditions. For the year, principal advances of $281.5 million exceeded repayments of $263.6 million which drove 3.2% growth in the mortgage portfolio to a record $893.6 million at year end. Opportunities to invest in high quality mortgages were created from the pull back in lending from major banks and other private lenders in spite of slower market activity. Despite a strong year in terms of financial performance, management remains focused on maintaining a resilient mortgage portfolio that can withstand the downturn in the market cycle while continuing to produce strong returns for shareholders. Over the course of the year, Atrium continued to build a strong balance sheet. In late August, Atrium closed on the sale of its investment property in Saskatchewan for a slight gain above book value which created additional funding capacity on the credit facility. On August 28, 2023, the company amended its credit facility to (i) extend the date of maturity to July 31, 2025 (ii) reset the accordion option to $60 million to increase the maximum availability to $375 million and (iii) improved our covenant terms to 0.55 debt-to-assets and 0.40 senior debt-to-assets from 0.50 and 0.35, respectively. The renewal of our facility provides an adequate source of funding and liquidity for the company going forward. Atrium remains well capitalized with equity capital of $482.2 million and convertible debentures of $157.6 million. Most of the debentures are locked in at favorable rates for several years with $25.3 million first coming due in June 2024. Our total balance sheet debt remained modest at 45.1% of total assets at year end. MANAGEMENT’S DISCUSSION AND ANALYSIS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 11 The mortgage portfolio rate at year end was 11.42% which represented a slight decrease from 11.49% in the third quarter and an increase from 10.77% at the beginning of the year. The slight decrease over the fourth quarter was due to the origination of lower risk profile loans while the increase over the prior year was driven by Bank of Canada increases in the target overnight rate. These rate increases resulted in benchmark rates rising 75bps over 2023 and 400bps over 2022. The mortgage portfolio rate benefited from these rate increases as the percentage of loans priced off floating rates steadily increased from 75.4% to 89.8% over the course of the year with the majority having rate floors in place. The increase in rates, however, also resulted in a higher weighted average cost of borrowing of 7.19% over 2023 compared to 4.57% in the prior year as our credit facility pricing is benchmarked to prime. The impact on earnings has been mitigated by the fact that the credit facility represented only 24.7% of total funding sources at year end. The total allowance for mortgage losses was 2.53% of the gross mortgage portfolio at year end which increased from 2.03% in the third quarter and 1.24% at the beginning of the year. These increases were due to a higher assessment of credit risk relating to specific loans in the mortgage portfolio. Loans classified in Stage 2 and Stage 3 are individually assessed for credit losses while loans classified in Stage 1 are assessed on a collective basis using the expected credit loss model. Loans in Stage 2 have increased from $26.0 million at the beginning of the year to $122.0 million at year end whereas loans in Stage 3 increased from $nil to $36.7 million. Elevated levels of interest rates combined with high inflation and general economic uncertainties has put increased stress on borrowers for all lenders including Atrium. The Stage 1 provision remained elevated at 1.04% of the gross mortgage portfolio at year end due to weak forward looking macroeconomic indicators such as GDP growth, housing pricing and unemployment. The business, however, has continued to produce record earnings in spite of its prudent approach to loan loss provisioning. Management remains focused on successfully navigating through the current downturn and positioning the business for growth when market conditions improve. The mortgage portfolio remained solid at year end with 94.6% of mortgages in first position and 94.0% of mortgages with less than 75% LTV. In addition, the LTV of the mortgage portfolio remained low at 61.4% and concentrated in highly liquid urban markets in Ontario and BC. Our management team is experienced working in different market cycles and is prepared for challenging market conditions that will persist going into 2024. Although some reprieve may be afforded by lower inflation and interest rates in the latter part of the year, management’s priority remains adhering to strict risk management principles in order to protect shareholder capital. Results of Operations (In this section, dollars are in thousands of Canadian dollars, except per share amounts) Financial summary Revenue Mortgage servicing and management fees Other expenses Impairment loss on investment property held for sale Recovery of prior mortgage loss Provision for mortgage losses Income before financing costs Financing costs Net income and comprehensive income Basic earnings per share Diluted earnings per share Dividends declared Mortgages receivable, end of year Total assets, end of year Shareholders’ equity, end of year Book value per share, end of year $ $ Year Year Year ended ended ended December 31 December 31 December 31 2021 2022 2023 64,235 78,371 98,574 (7,241) (8,526) (8,465) (1,382) (1,098) (1,299) − (1,832) − − 1,050 492 (1,289) (1,914) (11,894) 54,323 66,051 77,408 (12,530) (19,719) (25,923) 41,793 46,332 51,485 $ $ $ $ $ $ $ 1.18 1.14 52,095 $ 876,733 $ 877,877 $ 482,206 10.97 $ $ $ $ 1.08 1.06 48,736 $ 860,374 $ 874,780 $ 475,564 10.97 $ $ $ $ 0.98 0.98 41,346 $ 759,225 $ 775,487 $ 470,167 10.98 $ 12 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • MANAGEMENT’S DISCUSSION AND ANALYSIS Summary of quarterly results (unaudited) Revenue Mortgage servicing and management fees Other expenses Impairment of investment property held for sale Recovery of prior mortgage losses Recovery of (provision for) mortgage losses Income before financing costs Financing costs Net income and comprehensive income Basic earnings per share Diluted earnings per share Dividends declared Q4 2023 Q3 2023 $ 25,412 $ 25,907 (2,153) (2,206) (241) (282) − − 220 115 (4,810) (5,442) 17,796 (6,804) $ 10,992 $ 0.25 $ 0.25 $ 9,854 18,724 (6,872) $ 11,852 $ 0.27 $ 0.26 $ 22,634 Q2 2023 Q1 2023 $ 23,707 $ 23,548 (2,054) (2,052) (444) (332) − − 157 − (952) (690) 20,414 20,474 (6,202) (6,045) $ 14,212 $ 14,429 $ 0.33 $ 0.33 $ 0.31 $ 0.32 $ 9,785 $ 9,822 Q4 2022 $ 23,159 (2,131) (270) − 50 (1,230) 19,578 (6,345) $ 13,233 $ 0.31 $ 0.30 $ 19,707 Q3 2022 $ 20,634 (2,056) (292) − − (1,114) 17,172 (5,346) $ 11,826 $ 0.27 $ 0.27 $ 9,706 Q2 2022 $ 18,201 (2,461) (212) − 200 (583) 15,145 (4,470) $ 10,675 $ 0.25 $ 0.25 $ 9,675 Q1 2022 $ 16,377 (1,878) (324) (1,832) 800 1,013 14,156 (3,558) $ 10,598 $ 0.25 $ 0.25 $ 9,648 Results of operations – Three months ended December 31, 2023 For the three months ended December 31, 2023, mortgage interest and fees revenues aggregated $25,900, compared to $22,961 in the comparative period, an increase of 12.8%. Virtually all our revenues are mortgage interest; therefore, the increase in revenue is due to a higher weighted average interest rate in the current quarter and a higher mortgage portfolio balance this quarter compared to the fourth quarter of 2022. The higher weighted average interest rate was driven by higher benchmark market rates compared to the prior year. A variety of other factors can affect the changes in the weighted average interest rate of our mortgage portfolio from quarter to quarter. No single factor is determinative or material for the mortgage portfolio as a whole, however, such factors include, but are not limited to, the timing of changes in the prime rate of interest, the timing and dollar amount of mortgages advanced and/or repaid in the period, the types of properties on which mortgage loans are advanced and/or repaid in the period, the location of the underlying properties on which mortgage loans are advanced and/or repaid, the types of mortgage loans advanced and/or repaid during the period and whether the mortgage loans advanced and/or repaid during the period are conventional or non- conventional mortgages. The weighted average interest rate on our mortgage portfolio was 11.42% at December 31, 2023, compared with 10.77% at December 31, 2022. We generated a net rental income of $7 for the three months ended December 31, 2023 from our investment property compared to net rental income of $198 for the three months ended December 31, 2022 as a result of the disposition of the 90 unit property in Regina. Operating expenses, excluding the provision for mortgage losses, and recovery of prior mortgage losses for the three months ended December 31, 2023 were $2,488, compared to $2,401 in the comparative period, an increase of 3.6%. This increase is primarily due to an increase in mortgage servicing and management fees and an increase in administration and general expenses. Mortgage servicing and management fees paid (that is, the management fee plus HST) aggregated $2,206 for the three months ended December 31, 2023, compared with $2,131 in the comparative period. This increase was due to an increase in the mortgage portfolio balance in the current quarter as well as timing variations in mortgage fundings between the quarters, as mortgage servicing fees are calculated and paid monthly based on the mortgage portfolio balance outstanding during the month. Administration and general expenses for the three months ended December 31, 2023 were $49, compared to $36 in the comparative period due to an increase in the allocation of wages. The recovery of prior mortgage loss was ($115) in the quarter compared to ($50) in the comparative period. The provision for mortgage losses was $4,810 in the quarter, for a total allowance of $20,600 at December 31, 2023 compared to a provision of $1,230 in the comparative period and a total allowance of $10,706 at December 31, 2022 due to higher credit risk in the mortgage portfolio. Financing costs for the three months ended December 31, 2023 were $6,872, compared to $6,345 in the same period of 2022, an increase of 8.3%. Coupon rate interest on convertible debentures was $2,150 for the three months ended December 31, 2023 compared to $2,156 for the comparative period. The book value of convertible debentures as at December 31, 2023 was $157,610, compared to $155,964 as at December 31, 2022. Accretion and other costs were $413 for the three months ended December 31, 2023 compared to $413 for the comparative period. Interest expense on the credit facility was $4,129 for the three months ended December 31, 2023, up from $3,612 for the comparative period. This increase is due to a higher weighted average cost of borrowing in the fourth quarter of 2023 (7.55%) compared to the fourth quarter of 2022 (6.25%) as a result of increases in the prime rate and banker’s acceptance rates between the periods. Net income and comprehensive income for the three months ended December 31, 2023 was $11,852, a decrease of 10.4% from net income and comprehensive income of $13,233 for the same period in the prior year. Basic and diluted earnings per common share were $0.27 and $0.26, respectively, for the three months ended December 31, 2023, compared with $0.31 and $0.30 basic and diluted earnings per share for the comparable period. During the three months ended December 31, 2023, we funded mortgages receivable aggregating $46,114. Of those advances, $38,000 were first mortgages, representing 82.4% of the total loans funded. British Columbia advances were $3,069, non-GTA Ontario were $6,052 and the remaining $36,993 were for mortgages on properties located in the Greater Toronto Area. There were $28,109 of repayments during the period. MANAGEMENT’S DISCUSSION AND ANALYSIS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 13 Results of operations – Year ended December 31, 2023 For the year ended December 31, 2023, mortgage interest and fees revenues aggregated $97,940, compared to $77,863 in the prior year, an increase of 25.8%. Virtually all our revenues are mortgage interest; therefore, the increase in revenue is due to a higher weighted average interest rate in the current period and a higher mortgage portfolio balance this period compared to the prior year. The higher weighted average interest rate was driven by higher benchmark market rates compared to the prior year. A variety of other factors can affect the changes in the weighted average interest rate of our mortgage portfolio from year to year. No single factor is determinative or material for the mortgage portfolio as a whole, however, such factors include, but are not limited to, the timing of changes in the prime rate of interest, the timing and dollar amount of mortgages advanced and/or repaid in the period, the types of properties on which mortgage loans are advanced and/or repaid in the year, the location of the underlying properties on which mortgage loans are advanced and/or repaid, the types of mortgage loans advanced and/or repaid during the year and whether the mortgage loans advanced and/or repaid during the year are conventional or non-conventional mortgages. The weighted average interest rate on our mortgage portfolio was 11.42% at December 31, 2023, compared with 10.77% at December 31, 2022. We generated net rental income of $634 for the year ended December 31, 2023 from our investment properties compared to net rental income of $508 for the year ended December 31, 2022. The increase was a result of an improvement in the vacancy rate and higher rents for the 90 unit property in Regina but partially offset by the disposition of the 90 unit property in Regina in the third quarter of 2023. Operating expenses, excluding the provision for mortgage losses, impairment of investment properties held for sale and recovery from prior mortgage losses for the year ended December 31, 2023 were $9,764, compared to $9,624 in the prior year, an increase of 1.5%. Mortgage servicing and management fees paid (that is, the management fee plus HST) aggregated $8,465 for the year ended December 31, 2023, compared with $8,526 in the prior year. This decrease was due a one-time catch-up of mortgage servicing fees incurred for mortgages that were serviced by third parties in the prior year. We incurred a fair value adjustment on deferred share units of ($29) compared to a fair value adjustment of ($160) in the prior year due to fluctuations in the share price during the periods. Director fees for the year ended December 31, 2023 of $301 increased from $255 in the prior year due to the appointment of a new director as well as travel expenses incurred by the directors in the current year. Operating expenses in the prior year included an impairment of investment properties held for sale of $1,832 compared to $nil in the year ended December 31, 2023. Recovery of prior mortgage losses in the year ended December 31, 2023 was ($492) compared to ($1,050) in the prior year. The provision for mortgage losses was $11,894 in the year, for a total allowance of $20,600 at December 31, 2023 compared to a provision of $1,914 in the prior year for a total allowance of $10,706 at December 31, 2022 due to increased credit risk of the portfolio. Financing costs for the year ended December 31, 2023 were $25,923, compared to $19,719 in the prior year, an increase of 31.5%. Coupon rate interest on convertible debentures was $8,626 for the year ended December 31, 2023 compared to $8,174 in the prior year. This increase was a result of the March 18, 2022 convertible debenture issuance being only partially outstanding in the prior year. Accretion and other costs were $1,666 for the year ended December 31, 2023 compared to $1,547 in the prior year. Interest expense on the credit facility was $15,129 for the year ended December 31, 2023, up from $9,463 in the prior year. This increase is due to a higher weighted average cost of borrowing in the year ended December 31, 2023 (7.19%) compared to the year ended December 31, 2022 (4.57%) as a result of increases in the prime rate and banker’s acceptance rates between the periods. Net income and comprehensive income for the year ended December 31, 2023 was $51,485, an increase of 11.1% from net income and comprehensive income of $46,332 in the prior year. Basic and diluted earnings per common share were $1.18 and $1.14, respectively, for the year ended December 31, 2023, compared with $1.08 and $1.06 basic and diluted earnings per share for the previous year. During the year ended December 31, 2023, we funded mortgages receivable aggregating to $307,564. Of those advances, $280,910 were first mortgages, representing 91.3% of the total loans funded. British Columbia advances were $37,208, Alberta advances were $640, non-GTA Ontario advances were $22,297 and the remaining $247,419 were for mortgages on properties located in the Greater Toronto Area. There were $280,267 of repayments during the year. Liquidity and capital resources As at December 31, 2023, we had borrowings under the credit facility (excluding unamortized and prepaid financing costs) of $218,281. The credit facility, currently authorized for up to $315,000 (December 31, 2022 – $315,000), is provided by a syndicate of five major chartered banks, drawn through a combination of bankers’ acceptances and bank loans to minimize our borrowing costs. On August 28, 2023, the company entered into an amendment to its existing credit facility in order to, among other things, extend the maturity date, increase the accordion from $35,000 to $60,000, and favourably amend the financial covenants. At December 31, 2023, we had five series of convertible debentures outstanding, with a total book value of $157,610 and a face value (and maturity value) of $163,300. For additional information on the operating credit facility and the debentures, please refer to Notes 7 and 9, respectively, 14 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • MANAGEMENT’S DISCUSSION AND ANALYSIS of our accompanying consolidated financial statements. The growth in our mortgage portfolio since inception has been financed by the issuance of common shares, issuance of convertible debt, and through the operating credit facility. We expect to be able to generate sufficient funds for future growth in net mortgage loan investments by utilizing those three sources of funds. As at December 31, 2023, total balance sheet debt was 45.1% of total assets (December 31, 2022 – 45.6%). Changes in financial position Cash used in investing activities during the year ended December 31, 2023 consisted of advances of principal on mortgage loan investments of $281,507 less principal repayments received of $263,597, for net cash advances of mortgage loan investments of $17,910. Borrowings under our operating credit facility (excluding unamortized and prepaid financing costs) decreased to $218,281 at December 31, 2023, from $223,959 at December 31, 2022, due to the sale of the 90 unit property in Regina. Accounts payable and accrued liabilities, including accrued convertible debenture interest, was $5,025 at December 31, 2023 compared to $7,041 at December 31, 2022. Dividends payable was $16,047 at December 31, 2023, up from $13,217 at December 31, 2022 as the December 31, 2023 balance included the special dividend for 2023 that will paid on February 29, 2024 of $0.29 per share compared to $0.23 per share for 2022. Share capital increased to $478,903 at December 31, 2023 from $471,882 at December 31, 2022, primarily due to the issuance of common shares under the dividend reinvestment plan. Contractual obligations Contractual obligations due at December 31, 2023 were as follows: As at December 31, 2023 Borrowings under credit facility Accounts payable and accrued liabilities Accrued convertible debenture interest Dividends payable Convertible debentures Total contractual obligations Total obligation Within 1 year 1 to 3 years 3 to 5 years $243,741 4,109 916 16,047 189,182 $453,995 $ 16,080 $227,661 $ – – – – – – – 42,056 73,107 $ 70,408 $300,768 $ 42,056 4,109 916 16,047 33,256 More than 5 years $ – – – – 40,763 $ 40,763 We have commitments to advance additional funds under existing mortgages of $37,239 and for new mortgages of $1,992 at December 31, 2023 (December 31, 2022 – $76,625, $1,693 respectively). Generally, outstanding commitments are expected to be funded within the next 24 months. However, our experience has been that a portion of the unfunded amounts on existing mortgages will never be drawn. Off-balance sheet arrangements As at December 31, 2023, we had $12,171 (December 31, 2022 – $12,158) of letters of credit (LCs) outstanding which were issued under our operating credit facility. The maximum available by way of LCs under our operating credit facility at December 31, 2023 was $25,000 (December 31, 2022 – $25,000). LCs represent irrevocable assurances that our banks will make payments in the event that a borrower of the company cannot meet its obligations to third parties. LCs carry the same credit risk, recourse and collateral security requirements as mortgages extended to customers. $601 of cash was received, and is recorded in accounts payable and accrued liabilities for letters of credit on mortgages that are discharged (December 31, 2022 – $3,551). Transactions with related parties Transactions with related parties are in the normal course of business and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties, and are measured at fair value. The manager is responsible for our day-to-day activities. We incurred management and mortgage servicing fees from a subsidiary of the manager of $8,379 (including HST) for the year ended December 31, 2023 (year ended December 31, 2022 – $7,977). Mr. Robert G. Goodall is a director and part of the key management personnel of the manager, received compensation from the manager, and is also a director of Atrium. The management agreement between us and the manager contains provisions for the payment of termination fees to the manager in the event that MANAGEMENT’S DISCUSSION AND ANALYSIS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 15 the management agreement is terminated in certain circumstances. The manager also acts as broker for our mortgages. The manager receives origination fees from the borrowers of up to 1% of the amount being funded; origination fees in excess of 1% are split between the manager and Atrium. During the year ended December 31, 2023, CMCC reimbursed the company for share-based payments of $113 related to grants under the company’s DSIP (year ended December 31, 2022 – $42). Under an employee share purchase plan (ESPP) for the company’s common shares, participants, including employees of CMCC, may contribute up to an annual maximum to the ESPP and CMCC matches 50% of the participants’ contributions. The total amount matched by CMCC for the year ended December 31, 2023 was $69 (year ended December 31, 2022 – $64). Certain of the company’s mortgages receivable are shared with other investors. As at December 31, 2023, companies owned by a director and/or officer of the company were not co-invested in any syndicated mortgages receivable (December 31, 2022 – one syndicated mortgage receivable of $22,000, of which the company’s share was $21,000, of which $19,750 had been funded). As at December 31, 2023, the company had nil mortgages receivable (December 31, 2022 – two) from borrowers over which a director and/or officer of the company has joint control, with the company’s share of the gross commitments totaling $nil (December 31, 2022 – $9,200), of which $nil had been funded at December 31, 2023 (December 31, 2022 – $8,350). During the year ended December 31 2023, the company recognized net mortgage interest and fees of $377 (year ended December 31, 2022 – $1,428) from two (December 31, 2022 – four) mortgages receivable from borrowers over which a director and/or officer of the company has joint control. Critical accounting estimates and policies Our consolidated financial statements for the year ended December 31, 2023 are prepared in accordance with Canadian generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), as set out in Part I of the CPA Canada Handbook. The preparation of consolidated financial statements in accordance with IFRS requires management to make estimates, assumptions and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date and the reported amounts of revenue and expenses during the reporting period. The most subjective of these estimates relate to: (a) determining whether the cash flows from the mortgages receivable represent solely payments of principal and interest (SPPI); (b) the measurement of impairment losses for mortgages receivable, in particular: measurement of credit risk to determine whether there has been a significant increase in credit risk since initial recognition; the assessment of when mortgages receivable become impaired and the incorporation of forward-looking information to determine expected credit losses; (c) the measurement of fair value, cost of disposal and the value in use of investment properties; (d) the measurement of the liability and equity components of the convertible debentures, which depend upon the estimated market interest rates for a comparable debenture without the convertibility feature; and (e) the measurement of fair value of the purchased or originated credit-impaired financial assets reflecting the lifetime expected credit losses. Management believes that its estimates are appropriate; however, actual results could differ from the amounts estimated. Estimates and underlying assumptions are reviewed each quarter. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. Economic uncertainties that began from the onset of the COVID-19 pandemic continue to persist. This has resulted in a challenge of reliably estimating the impact on financial results and condition of the company in future periods. Accordingly, there is inherently more uncertainty associated with the estimates, judgements and assumptions made by management in the preparation of the consolidated financial statements. It is not possible to forecast with certainty the extent to which the economic impact will affect the company’s operations and financial results in the near-term and long-term. Areas of the company’s business that could potentially be adversely impacted include, but are not limited to, mortgage interest rates, mortgage interest and fees revenue, rental income, allowance for mortgage losses and valuation of investment properties. Management continues to monitor and assess the impacts of these economic uncertainties on its estimates, judgements and assumptions. Mortgages receivable Mortgages receivable are a financial asset and are recognized initially at fair value and are subsequently carried at amortized cost using the effective interest method. All our mortgages receivable are held in a single business model. We have concluded that our business model is to hold mortgages receivable to collect contractual cash flows that represent SPPI. Mortgages receivable and commitments are assessed for impairment at the end of each reporting period using an 16 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • MANAGEMENT’S DISCUSSION AND ANALYSIS expected credit loss (ECL) model. The ECL model uses a three-stage impairment approach based on changes in the credit risk of the commitment or mortgage receivable since initial recognition. Credit quality is assessed at each reporting period and results in commitments and mortgages receivable being moved between stages, as necessary. Significant judgement is required when assessing evidence of credit impairment and estimating expected credit losses. For commitments and mortgages receivable, the company considers a number of past events, current conditions and forward-looking information when assessing if there has been a significant increase or subsequent decrease in credit risk. The company considers a commitment or mortgage receivable to be impaired when there is objective evidence that one or more events have occurred that have an unfavourable impact on estimated future cash flows such that there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. An ECL represents the difference between the present value of all contractual cash flows that are due under the original terms of the contract and the present value of all cash flows expected to be received. The company’s application of the concept uses three inputs to measure ECLs for commitments and mortgages receivable classified as Stage 1: probability of default (PD), loss given default (LGD) and exposure at default (EAD). These inputs are determined at each reporting period using historical data and current conditions. Adjustments may be made to the probability of default if the effects of, for example, forecasts of housing prices, employment and interest rates, are expected to be significant over the term of the mortgage. The inputs for Stage 1 mortgages receivable are calculated separately for (i) mortgages receivable on single-family residences and (ii) mortgages receivable on all other properties on the basis of differences in the credit risk of each. The ECL is assessed individually for each commitment and mortgage receivable classified as either Stage 2 or Stage 3. For mortgages receivable in these stages, forecast future information specific to the loan (for example, forecasts of real estate prices) is incorporated when assessing the cash flows expected to be received. The ECL methodology was modified to include an overlay adjustment to account for the uncertainty and difficulty in forecasting future economic conditions which began at the onset of the COVID-19 pandemic and continue to persist. Mortgages receivable are presented on the consolidated statements of financial position net of the allowance for mortgage losses. A loss on a mortgage is written off against the related allowance for mortgage losses when there is no reasonable expectation of further recovery, which is the point at which the underlying real property has been liquidated and claims against guarantors, if any, are unlikely to recover any further losses. For any mortgages receivable that have been written off but where guarantors are still being pursued for collection, no recovery is recognized until it is virtually certain of collection. For further information see Note 3 (a) and (c) of our consolidated financial statements for the year ended December 31, 2023. Revenue recognition Mortgage interest and fees revenues are recognized in the statement of income and comprehensive income using the effective interest method, except mortgage interest and fees revenue on purchased or originated credit-impaired financial assets. Mortgage interest and fees revenues include our share of any fees received, as well as the effect of any discount or premium on the mortgage. Interest revenue is calculated on the gross carrying amount for mortgages receivable in Stages 1 and 2 and on the net carrying amount for mortgages receivable in Stage 3. The effective interest method derives the interest rate that discounts the estimated future cash receipts during the expected life of the mortgage receivable (or, where appropriate, a shorter period) to its carrying amount. When calculating the effective interest rate, future cash flows are estimated considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes all fees and transaction costs paid or received. Fees and transaction costs include incremental revenues and costs that are directly attributable to the acquisition or issuance of the mortgage. Mortgage interest and fees revenue on purchased or originated credit-impaired financial assets is recognized in the consolidated statements of income and comprehensive income using the credit-adjusted effective interest rate, reflecting the expected credit losses, to the financial asset from initial recognition. Convertible debentures The convertible debentures can be converted into our common shares at the option of the investor. They are compound financial instruments with two components: a financial liability, and a call option which is an equity instrument. The fair value of the liability component is measured as of the date that the debentures were issued, and the equity instrument is valued on that date based upon the difference between the fair value of the debenture and the fair value of the liability component. The measurement of the fair value of the liability component is based upon market rates of interest on similar debt instruments without the conversion feature. Expenses of issue are allocated between the two components on a pro-rata basis. The book value of the debt is accreted up to its face value over the life of the financial liability using the effective interest method, which provides for the application of a constant interest rate over the term of the debt. The value of the equity component is not re-measured subsequent to its initial measurement date. MANAGEMENT’S DISCUSSION AND ANALYSIS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 17 Income taxes We are, and intend to maintain our status as, a MIC, and as such are not taxed on income provided that it flows through to our shareholders as dividends during the year or within 90 days after December 31 each year. It is our policy to pay such dividends to our shareholders to remain non-taxable. Accordingly, no provision for current or future income taxes is required. Interest rate benchmark reform Various interest rates that are deemed to be “benchmarks” including the Canadian Dollar Offered Rate (CDOR) have been subject to proposals for reform. Following announcements by regulators, CDOR will cease to be published following a final publication on June 28, 2024. In July 2023, the Canadian Alternative Reference Rate working group introduced a “no new CDOR or Banker’s Acceptance loan” milestone date of November 1, 2023 to facilitate a tapered transition for the loan market. The company has incorporated these developments into its efforts to transition to the new benchmark rate. The credit facility has been amended to facilitate the transition to the new benchmark and the company does not expect the transition to have a material impact. Future changes in accounting policies Various pronouncements have been issued by the International Accounting Standards Board or IFRS Interpretations Committee that will be effective for future accounting periods. The company closely monitors new accounting standards as well as amendments to existing standards and assesses what impact, if any, they will have on the consolidated financial statements. None of the standards issued to date are expected to have a material effect on the consolidated financial statements. Controls and procedures Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument (NI) 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings. We designed the DC&P and ICFR, the latter of which was using the framework in Internal Control – Integrated Framework (published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and as revised in 2013) to provide reasonable assurance (i) that material information relating to us is made known to our CEO and CFO during the reporting period; (ii) that information required to be disclosed by us in our filings under securities legislation is recorded, processed, summarized and reported within the required time periods; (iii) regarding the reliability of financial reporting and preparation of consolidated financial statements for external purposes in accordance with Canadian GAAP. Our CEO and CFO evaluated the design effectiveness of the DC&P and ICFR, as defined by NI 52-109, as of December 31, 2023. Based on this evaluation, they concluded that the designs of the DC&P and ICFR were effective as of that date. NI 52-109 also requires Canadian public companies to disclose in their MD&A any change in ICFR during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, ICFR. No such change to ICFR has occurred during the most recently completed year. It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Because of the inherent limitations in any control system, no evaluation of control can provide absolute assurance that all control weaknesses including, for example, any instances of fraud, have been detected. Inherent limitations include: (i) that management’s assumptions and judgements could ultimately prove to be incorrect as conditions and circumstances vary; (ii) the impact of any undetected errors; and (iii) controls may be circumvented through the unauthorized acts of individuals, by collusion of two or more people, or by management override. The design of any system of control is also based upon assumptions as to the likelihood of future events and there is no assurance that any design will succeed in achieving its goals under future conditions. Outstanding share data Our authorized capital consists of an unlimited number of common shares, of which 43,965,481 were issued and outstanding at December 31, 2023, and 44,053,584 were issued and outstanding as at the date hereof. In addition, as at the date hereof, 1,693,440, 2,211,540, 1,949,152, 1,971,430 and 2,402,986 common shares are issuable upon conversion or redemption or in respect of repayment at maturity of the outstanding 5.30%, 5.50%, 5.60%, 5.00% and the 5.10% convertible debentures, using the conversion price of $14.94, $15.60, $14.75, $17.50 and $16.75 respectively, for each common share. 18 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • MANAGEMENT’S DISCUSSION AND ANALYSIS We also have an employee share purchase plan, a deferred share incentive plan and a dividend reinvestment plan pursuant to which common shares are issued from time to time. Normal course issuer bid On June 16, 2022, the company announced that the TSX had accepted a notice filed by the company of its intention to make a normal course issuer bid (NCIB) with respect to its common shares. The notice provides that the company may purchase up to 3,000,000 common shares during the twelve month period commencing June 24, 2022 and ending on June 23, 2023. On June 13, 2023, the company announced that the TSX had approved renewal of the NCIB to purchase up to 4,176,336 common shares during the twelve month period commencing June 24, 2023 and ending on June 23, 2024. During the year ended December 31, 2023 the company purchased 37,527 common shares under the NCIB (year ended December 31, 2022 – nil) for a total cost of $378 (year ended December 31, 2022 - $nil). Risks and uncertainties We are subject to many risks and uncertainties that may limit our ability to execute our strategies and achieve our objectives. We have processes and procedures in place in an attempt to control or mitigate certain risks, while others cannot be or are not mitigated. Material risks that cannot be mitigated include a significant decline in the general real estate market, interest rates changing markedly, being unable to make mortgage loans at rates consistent with rates historically achieved, not having adequate mortgage loan opportunities presented to us, and not having adequate sources of debt or equity financing available. Under various federal, provincial and municipal laws, an owner or operator of real property could become liable for the cost of removal or remediation of certain hazardous or toxic substances released on or in its properties or disposed of at other locations. In rare circumstances where a mortgage is in default, we may take possession of real property and may become liable for environmental issues as a mortgagee in possession. As part of the due diligence performed in respect of our mortgage loan investments, we obtain a Phase I environmental audit on the underlying real property provided as security for a mortgage, unless the manager has determined that a Phase I environmental audit is not necessary. Please also refer to “Forward-looking information,” below, and the “Risk Factors” section of our Annual Information Form for the year ended December 31, 2023 which is incorporated herein by reference and is available at www.sedarplus.ca and at www.atriummic.com. Forward-looking information From time to time in our public communications we provide forward-looking statements. Such statements are disclosures regarding possible events, conditions, results of operations or changes in financial position that are based upon assumptions and expectations. These are not based upon historical facts but are with respect to management’s beliefs, estimates, and intentions. Forward-looking statements generally can be identified by the use of forward- looking terminology such as “outlook”, “objective”, “may”, “will”, “expect”, “intent”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “continue” or similar expressions suggesting future outcomes or events. Forward- looking statements regarding earnings, possible mortgage losses, and mortgage portfolio growth are based upon assumptions regarding performance of the economy in general and real estate markets in particular. Forward-looking statements generally assume that our revenues and expenses continue to follow current trends, and that current trends in our mortgage portfolio growth continue. All forward-looking statements reflect management’s current beliefs and are based on information currently available to management. These statements are not guarantees of future performance and are based on our estimates and assumptions that are subject to risks and uncertainties which could cause our actual results to differ materially from the forward-looking statements contained in this MD&A or elsewhere. Those risks and uncertainties include risks associated with mortgage lending, competition for mortgage lending, real estate values, interest rate fluctuations, environmental matters and the general economic environment. For other risks and uncertainties, please refer to “Risks and uncertainties” above, and the “Risk Factors” section of our Annual Information Form for the year ended December 31, 2023 which is available at www.sedarplus.ca and at www.atriummic.com. That list is not exhaustive, as other factors could adversely affect our results, performance or achievements. The reader is cautioned against undue reliance on any forward-looking statements. Although the forward-looking information contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. We will not publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, unless required to do so by law. MANAGEMENT’S DISCUSSION AND ANALYSIS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 19 Responsibility of management and the board of directors Management is responsible for the information disclosed in this MD&A, and has in place the appropriate information systems, procedures and controls to ensure that the information used internally by management and disclosed externally is materially complete and reliable. In addition, our audit committee and board of directors provide an oversight role with respect to our public financial disclosures, and have reviewed and approved this MD&A and the consolidated financial statements as at December 31, 2023. Dividend Reinvestment Plan We have a Dividend Reinvestment Plan (DRIP) which is available to holders of our common shares. The DRIP allows participants to have their monthly cash dividends reinvested in additional common shares, at a discount of 2% from the market price. Additional information Additional information about Atrium, including our Annual Information Form for the year ended December 31, 2023, is available on SEDAR+ at www.sedarplus.ca. You may also obtain further information about us from our website at www.atriummic.com, by telephone at (416) 867-1053, or by email at info@atriummic.com. (cid:3) (cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71) (cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86) (cid:60)(cid:72)(cid:68)(cid:85)(cid:85)(cid:3)(cid:40)(cid:81)(cid:71)(cid:72)(cid:71)(cid:71)(cid:3) (cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:15)(cid:3)(cid:21)(cid:19)(cid:21)(cid:22) (cid:38)(cid:36)(cid:49)(cid:36)(cid:39)(cid:36)(cid:351)(cid:54)(cid:54)(cid:3)(cid:51)(cid:53)(cid:40)(cid:48)(cid:44)(cid:40)(cid:53)(cid:53)(cid:3)(cid:49)(cid:50)(cid:49)(cid:16)(cid:37)(cid:36)(cid:49)(cid:46)(cid:46)(cid:3)(cid:47)(cid:40)(cid:49)(cid:39)(cid:40)(cid:53)(cid:382) MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING To the shareholders of Atrium Mortgage Investment Corporation: Management of Atrium Mortgage Investment Corporation (Atrium) is responsible for the preparation, presentation and integrity of these consolidated financial statements, and the accompanying Management’s Discussion and Analysis. This responsibility includes the selection and consistent application of appropriate accounting principles and methods in addition to making the judgements and estimates necessary to prepare the consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Management of Atrium is responsible to provide reasonable assurance that assets are safeguarded and that relevant and reliable financial information is produced. We are required to design a system of internal controls and certify as to the design and operating effectiveness of internal controls over financial reporting. We have implemented a system of internal controls that we believe provides reasonable assurance in all material respects that transactions are authorized, assets are safeguarded and financial records are reliable for producing consolidated financial statements. Crowe Soberman LLP were appointed as the independent auditors by a vote of Atrium’s shareholders to audit the consolidated financial statements; their report appears on the next page. The board of directors, through the Audit Committee comprised solely of independent directors, is responsible for determining that management fulfills its responsibilities in the preparation of these consolidated financial statements and the financial control of operations. The Audit Committee recommends the independent auditors for appointment by the shareholders, and it meets regularly with senior and financial management to discuss internal controls and financial reporting matters. The independent auditors have unrestricted access to the Audit Committee. These consolidated financial statements and accompanying Management’s Discussion and Analysis have been approved by the board of directors based upon the review and recommendation of the Audit Committee. Toronto, Canada February 15, 2024 “Robert Goodall” Robert Goodall Chief Executive Officer “John Ahmad” John Ahmad Chief Financial Officer 26 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands of Canadian dollars) Notes 2023 2022 December 31 Assets Mortgages receivable Investment properties Prepaid expenses Total assets Liabilities Borrowings under credit facility Accounts payable and accrued liabilities Accrued convertible debenture interest Dividends payable Convertible debentures Total liabilities Shareholders’ equity Share capital Deferred share incentive plan units Equity component of convertible debentures Contributed surplus Deficit Total shareholders’ equity Total liabilities and shareholders’ equity 5 6 7 8, 12 9 10 $ 876,733 1,101 43 $ 877,877 $ 216,989 4,109 916 16,047 157,610 395,671 478,903 943 3,786 1,588 (3,014) 482,206 $ 877,877 $ 860,374 14,302 104 $ 874,780 $ 222,994 6,125 916 13,217 155,964 399,216 471,882 712 3,786 1,588 (2,404) 475,564 $ 874,780 Commitments 7, 14(d) The accompanying notes are an integral part of these consolidated financial statements. Approved on behalf of the board of directors: “Robert Goodall” Robert Goodall, Director “Mark Silver” Mark Silver, Director CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (in thousands of Canadian dollars, except for number of common shares) CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 27 Balance, December 31, 2021 Shares issued under dividend reinvestment plan Shares issued under employee share purchase plan Shares issued under deferred share incentive plan Share-based payments Equity component of convertible debentures issued Issue costs attributable to equity component of convertible debentures issued Net income and comprehensive income Dividends declared Balance, December 31, 2022 Shares issued under dividend reinvestment plan Shares purchased under normal course issuer bid Shares issued under employee share purchase plan Shares issued under deferred share incentive plan Share-based payments Net income and comprehensive income Dividends declared Balance, December 31, 2023 Notes 10 10 11 11 9 9 10 10 10 11 11 Share capital Number 42,807,014 470,927 16,440 41,614 – – – – – 43,335,995 631,187 (37,527) 18,710 17,116 – – – 43,965,481 Amount $ 465,491 5,666 193 532 – – – – – $ 471,882 6,969 (378) 207 223 – – – $ 478,903 Deferred share incentive plan units 866 $ – – (532) 378 – – – – 712 – – – (223) 454 – – 943 $ $ Equity $ component of convertible debentures 2,222 – – – – 1,640 (76) – – 3,786 – − – – – – – 3,786 $ $ Contributed surplus $ $ $ 1,588 – – – – – – – – 1,588 – − – – – – – 1,588 Deficit $ Total shareholders’ equity $ 470,167 5,666 193 – 378 1,640 – – – – – – – 46,332 (48,736) (2,404) – − – – – 51,485 (52,095) (3,014) $ $ (76) 46,332 (48,736) $ 475,564 6,969 (378) 207 – 454 51,485 (52,095) $ 482,206 Dividends amounted to $1.19 per share for the year ended December 31, 2023 (year ended December 31, 2022 – $1.13). The accompanying notes are an integral part of these consolidated financial statements. 28 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands of Canadian dollars, except for per share amounts) Years ended December 31 Notes 2023 Revenues Mortgage interest and fees Rental income Total revenues Operating expenses Mortgage servicing and management fees Transfer agent, regulatory fees and investor relations Share-based payments Professional fees Directors’ expense Administration and general Adjustment to fair value of deferred share units Impairment of investment property held for sale Recovery of prior mortgage loss Provision for mortgage losses Total operating expenses Income before financing costs Financing costs Interest on convertible debentures Interest and other financing charges Total financing costs 8 6 8 8, 11 8, 12 8, 12 6 5(b) 9 7, 12 $ 97,940 634 98,574 $ 8,465 283 341 240 301 163 (29) – (492) 11,894 21,166 77,408 10,292 15,631 25,923 2022 77,863 508 78,371 8,526 292 336 233 255 142 (160) 1,832 (1,050) 1,914 12,320 66,051 9,721 9,998 19,719 Net income and comprehensive income for the year $ 51,485 $ 46,332 Earnings per common share Basic Diluted 13 13 $ $ 1.18 1.14 $ $ 1.08 1.06 The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 29 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of Canadian dollars) Cash provided by (used in): Operating activities Net income and comprehensive income for the year Adjustments to determine net cash flows provided by (used in) operating activities Share-based payments Mortgage interest and fees earned Mortgage interest and fees received Interest on convertible debentures expensed Interest and other financing charges expensed Adjustment to fair value of deferred share units Impairment of investment property held for sale Provision for mortgage losses Recovery of prior mortgage loss Gain on disposition of investment property Changes in operating assets and liabilities Prepaid expenses Accounts payable and accrued liabilities Additions to unamortized origination fees Cash provided by operating activities Investing activities Cash advances of mortgages receivable Cash repayments of mortgages receivable Proceeds from disposition of investment property Cash used in investing activities Financing activities Advances under credit facility Repayments under credit facility Interest and fees on convertible debentures paid Interest and other financing charges paid Issuance of common shares Repurchase of common shares Issuance of convertible debentures Convertible debenture issue costs Cash dividends paid Cash provided by (used in) financing activities Increase in cash Cash, beginning of year Cash, end of year Years ended December 31 2023 2022 $ 51,485 $ 46,332 454 (97,940) 87,721 10,292 15,631 (29) – 11,894 (492) (74) 61 (2,056) 369 77,316 (281,507) 263,597 13,275 (4,635) 274,072 (279,750) (8,646) (15,889) 207 (378) – – (42,297) (72,681) – – – $ 378 (77,863) 62,858 9,721 9,998 (160) 1,832 1,914 (1,050) – 24 3,283 803 58,070 (517,601) 429,790 – (87,811) 569,855 (524,300) (7,829) (10,508) 193 – 40,250 (1,861) (36,059) 29,741 – – – $ The accompanying notes are an integral part of these consolidated financial statements. 30 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – NATURE OF OPERATIONS Atrium Mortgage Investment Corporation (the “company”) is a corporation domiciled in Canada, incorporated under the Ontario Business Corporations Act. The address of the company’s registered head office and principal place of business is Suite 900, 20 Adelaide Street East, Toronto, Ontario M5C 2T6. The company is a Mortgage Investment Corporation (MIC) as defined in Section 130.1(6) of the Canada Income Tax Act (ITA). Accordingly, the company is not taxed on income provided that its taxable income is paid to its shareholders in the form of dividends within 90 days after December 31 each year. Such dividends are generally treated by shareholders as interest income, so that each shareholder is in the same position as if the mortgage investments made by the company had been made directly by the shareholder. The company’s common shares are listed on the Toronto Stock Exchange (TSX) under the symbol AI and its convertible debentures are listed under the symbols AI.DB.C, AI.DB.D, AI.DB.E, AI.DB.F and AI.DB.G. NOTE 2 – BASIS OF PRESENTATION (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as set out in Part I of the CPA Canada Handbook – Accounting. Material accounting policies have been consistently applied in the preparation of these consolidated financial statements, which were authorized for issuance by the board of directors on February 15, 2024. (b) New and amended standards and interpretations Effective January 1, 2023, the company adopted the narrow-scope amendments to International Accounting Standard (IAS) 1, Presentation of Financial Statements, IFRS Practice Statement 2, Making Materiality Judgements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. The amendments require the disclosure of material accounting policy information rather than disclosing significant accounting policies, and clarify how to distinguish changes in accounting policies from changes in accounting estimates. These amendments had no material impact on the consolidated financial statements. (c) Basis of measurement These consolidated financial statements are prepared on the historical cost basis. (d) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is also the company’s functional currency. Dollars are expressed in thousands except for per share amounts or where the context requires otherwise. (e) Principles of consolidation These consolidated financial statements include the accounts of the company and Canadian Properties LP, which is considered to be a subsidiary for financial reporting purposes. Consolidation commenced the date the company obtained control and continues until control ceases. The company has consolidated the subsidiary from August 5, 2016, the date of its formation. All transactions and balances between the company and the subsidiary have been eliminated, including unrealized gains and losses, if any. (f) Interest rate benchmark reform Various interest rates that are deemed to be “benchmarks” including the Canadian Dollar Offered Rate (CDOR) have been subject to proposals for reform. Following announcements by regulators, CDOR will cease to be published following a final publication on June 28, 2024. In July 2023, the Canadian Alternative Reference Rate working group introduced a “no new CDOR or Banker’s Acceptance loan” milestone date of November 1, 2023 to facilitate a tapered transition for the loan market. The company has incorporated these developments into its efforts to transition to the new benchmark rate. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 31 NOTE 2 – BASIS OF PRESENTATION (continued) (f) Interest rate benchmark reform (continued) The credit facility has been amended to facilitate the transition to the new benchmark (see Note 7 – Credit facility) and the company does not expect the transition to have a material impact. (g) Use of estimates and judgements The preparation of consolidated financial statements in accordance with IFRS requires management to make estimates, assumptions and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. The most subjective of these estimates relate to: (a) determining whether the cash flows from the mortgages receivable represent solely payments of principal and interest (SPPI); (b) the measurement of impairment losses for mortgages receivable, in particular: measurement of credit risk to determine whether there has been a significant increase in credit risk since initial recognition; the assessment of when mortgages receivable become impaired and the incorporation of forward-looking information to determine expected credit losses; (c) the measurement of fair value, costs of disposal and the value in use of investment properties; (d) the measurement of the liability and equity components of the convertible debentures, which depend upon the estimated market interest rates for a comparable debenture without the convertibility feature; (e) the measurement of fair value of the purchased or originated credit-impaired financial assets reflecting the lifetime expected credit losses. Management believes that its estimates are appropriate; however, actual results could differ from the amounts estimated. Estimates and underlying assumptions are reviewed each quarter. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. Economic uncertainties that began from the onset of the COVID-19 pandemic continue to persist. This has resulted in a challenge of reliably estimating the impact on financial results and condition of the company in future periods. Accordingly, there is inherently more uncertainty associated with the estimates, judgements and assumptions made by management in the preparation of the consolidated financial statements. It is not possible to forecast with certainty the extent to which the economic impact will affect the company’s operations and financial results in the near-term and long-term. Areas of the company’s business that could potentially be adversely impacted include, but are not limited to, mortgage interest rates, mortgage interest and fees revenue, rental income, allowance for mortgage losses and valuation of investment properties. Management continues to monitor and assess the impacts of these economic uncertainties on its estimates, judgements and assumptions. NOTE 3 – MATERIAL ACCOUNTING POLICY INFORMATION (a) Financial instrument assets – initial recognition and measurement Financial instrument assets are initially recognized when the company becomes a party to a contract. On initial recognition, the measurement category is determined, based on: (i) the business model under which the asset is held, and (ii) the contractual cash flow characteristics of the instrument. Upon initial recognition, financial assets are measured as either: • Fair value through profit and loss (FVTPL) – which is the required measurement classification for instruments that are held for trading and derivative assets; • Amortized cost – if the instrument is held within a business model whose objective is to collect contractual cash flows and the cash flows represent SPPI; • Fair value through other comprehensive income (FVOCI) – which is required for debt instruments held in a dual-purpose business model, to collect contractual cash flows and to sell the instruments and can be irrevocably elected at initial recognition provided they have not been designated as FVTPL and are not held for trading; or • Designated as FVTPL – available on initial recognition provided certain criteria are met. 32 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – MATERIAL ACCOUNTING POLICY INFORMATION (continued) (a) Financial instrument assets – initial recognition and measurement (continued) All of the company’s mortgages receivable are held in a single business model. The company has concluded that its business model is to hold mortgages receivable to collect contractual cash flows for the following reasons: • The performance of the mortgage portfolio is assessed on the basis of effective yield, and not on a fair value basis, whether realized or unrealized. • Neither key management compensation nor remuneration paid to the company’s manager is based on the fair values of mortgages receivable. • Historically the company has not sold, and in the future has no expectations to sell, any of its mortgages receivable. While the company may decrease its interest in a syndicated mortgage receivable by transferring its interest, at its amortized cost carrying amount, to another lender in the syndicate, such transfers are consistent with the business model of holding mortgages receivable to collect contractual cash flows. The returns earned by the company on its mortgages receivable are interest rates that are set at levels to provide an acceptable profit margin based on the time value of money and credit risk, although other basic lending risks (for example, the location and quality of the underlying collateral) may also be built-in. There are no factors that give rise to variation in the return on the company’s mortgages receivable other than the time value of money, credit risk and other basic lending risks. Interest rates, or the credit spread for variable rate mortgages, are set for the full term of the mortgage, which is considered SPPI because the rate is still based on the time value of money and credit risk. The majority of the mortgages receivable can be prepaid after an initial closed period with no penalty, subject to the borrower providing advance written notice according to the terms of their mortgage so the return therefore represents SPPI. Mortgages receivable are initially recognized at fair value and are subsequently carried at amortized cost using the effective interest method. See Note 3(d) Financial instruments – revenue recognition. Purchased or originated credit-impaired financial assets are initially recognized at fair value and are subsequently carried at amortized cost using the credit-adjusted effective interest rate. (b) Financial instrument liabilities – initial recognition and measurement Financial liabilities are measured as either: • FVTPL – which is required for any financial instrument liabilities that are held for trading and for derivative liabilities; • Designated as FVTPL – available on initial recognition if either: the instrument includes one or more embedded derivatives and the host contract is not a financial asset; or if the designation meets certain criteria; • Designated as at fair value – if the instrument does not meet the criteria and is designated as at FVTPL and is not otherwise required to be measured as FVTPL, it can still be irrevocably designated at initial recognition as at fair value, meaning that changes in fair value related to changes in own credit risk are presented in other comprehensive income and other changes in fair value are presented in net income; or • Amortized cost – which is the default category and is also used for any host contract that is a financial instrument liability. The company’s borrowings under credit facility, accounts payable and accrued liabilities, except for the liability for the deferred share unit plan, dividends payable, accrued convertible debenture interest and the liability component of convertible debentures are measured at amortized cost. These financial instrument liabilities are initially recognized at fair value and are subsequently measured at amortized cost using the effective interest method. The liability for the deferred share unit plan is measured at FVTPL. This financial instrument liability is initially and subsequently measured at fair value. Gains and losses arising from changes in fair value are recorded in net income and comprehensive income in the period in which they arise. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 33 NOTE 3 – MATERIAL ACCOUNTING POLICY INFORMATION (continued) (c) Financial instruments – impairment of assets Loan commitments and letters of credit (collectively commitments) and mortgages receivable are assessed for impairment at the end of each reporting period using an expected credit loss (ECL) model. The ECL model uses a three-stage impairment approach based on changes in the credit risk of the commitment or mortgage receivable since initial recognition. The three stages are as follows: Credit stage and financial assets included Stage 1 – commitments and mortgages receivable on initial recognition and existing assets that have not shown a significant increase in credit risk since initial recognition Stage 2 – commitments and mortgages receivable that have experienced a significant increase in credit risk since initial recognition and up to the date of approval of the consolidated financial statements Stage 3 – impaired commitments and mortgages receivable for which there is objective evidence of impairment at the date of approval of the consolidated financial statements Impairment loss recognized 12-month ECL – portion of lifetime ECLs that represent the ECL from possible default events within the next 12 months losses from Lifetime ECL – expected possible default events over the expected life of the instrument, weighted by the likelihood of loss losses from Lifetime ECL – expected possible default events over the expected life of the instrument, weighted by the likelihood of loss Credit quality is assessed at each reporting period and results in commitments and mortgages receivable being moved between stages, as necessary. Significant judgement is required when assessing evidence of credit impairment and estimating expected credit losses. For commitments and mortgages receivable, the company considers a number of past events, current conditions and forward-looking information when assessing if there has been a significant increase or subsequent decrease in credit risk. There is a presumption in IFRS 9, Financial Instruments (IFRS 9) that credit risk has increased significantly once payments are 30 days past due. However, for single-family residential mortgages receivable, the company’s historical experience is that mortgages receivable can become 30 days past due, but be brought up to date by the borrower, therefore another additional risk factor also needs to be identified for the mortgages receivable to move to Stage 2. For single-family residential mortgages receivable that are not 30 days past due, a significant increase in credit risk may still be evidenced by the presence of one or more additional risk factors. For all other mortgages receivable, a significant increase in credit risk is considered to have occurred if payments are 30 days past due or if one or more additional risk factors are present. The additional risk factors used in assessing credit risk include: • • • • changes in the financial condition of the borrower; responsiveness of the borrower; other borrower specific information that may be available, without consideration of collateral; current economic conditions: interest rates, housing prices, real estate market statistics and employment statistics; and supportable forward-looking information: macro-economic factors, such as forecast real estate values and interest rate forecasts. • Determining whether there has been a significant increase in credit risk since initial recognition, or a subsequent reduction in credit risk back to the level at initial recognition, requires the exercise of significant judgement. The company considers a commitment or mortgage receivable to be impaired when there is objective evidence that one or more events have occurred that have an unfavourable impact on estimated future cash flows such that there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. The company considers a commitment or mortgage receivable to be in default if payments are greater than 90 days past due for single-family residential mortgages receivable or 30 days past due for all other mortgages receivable, or if an event of default has occurred under the terms of the mortgage commitment, including: non- payment of property taxes, a material adverse change in the financial position of the borrower and/or guarantors or a material adverse change in the property given as security. These definitions are consistent with industry practice. 34 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – MATERIAL ACCOUNTING POLICY INFORMATION (continued) (c) Financial instruments – impairment of assets (continued) An ECL represents the difference between the present value of all contractual cash flows that are due under the original terms of the contract and the present value of all cash flows expected to be received. The company’s application of the concept uses three inputs to measure ECLs for commitments and mortgages receivable classified as Stage 1: probability of default (PD), loss given default (LGD) and exposure at default (EAD). These inputs are determined at each reporting period using historical data and current conditions. Adjustments may be made to the probability of default if the effects of, for example, forecasts of housing prices, employment and interest rates, are expected to be significantly different over the term of the mortgage. The inputs for Stage 1 mortgages receivable are calculated separately for (i) single-family residential mortgages receivable and (ii) mortgages receivable on all other properties on the basis of differences in the credit risk of each. The ECL is assessed individually for each commitment and mortgage receivable classified as either Stage 2 or Stage 3. For mortgages receivable in these stages, forecast future information specific to the loan (for example, forecasts of real estate prices) is incorporated when assessing the cash flows expected to be received. The ECL methodology was modified to include an overlay adjustment to account for the uncertainty and difficulty in forecasting future economic conditions which began at the onset of the COVID- 19 pandemic and continue to persist. The financial reports of other lenders and financial institutions were reviewed to inform and modify the company’s estimates and determine the overlay adjustment. Mortgages receivable are presented on the consolidated statements of financial position net of the allowance for mortgage losses. A loss on a mortgage receivable is written off against the related allowance for mortgage losses when there is no reasonable expectation of further recovery, which is the point at which the underlying real property has been liquidated and claims against guarantors, if any, are unlikely to recover any further losses. For any mortgages receivable that have been written off but where guarantors are still being pursued for collection, no recovery is recognized until virtually certain of collection. Purchased or originated credit-impaired financial assets are identified as credit-impaired at the time of origination based on specific characteristics of the asset, including financial difficulty of the borrower or issuer, borrower credit history or a past due event. Originated credit-impaired financial assets are accounted for based on the present value of expected cash flows as opposed to their contractual cash flows. Any changes in expected cash flows over the life of the originated credit-impaired financial asset are recognized in net income and comprehensive income. (d) Financial instruments - revenue recognition Mortgage interest and fees revenue are recognized in the consolidated statements of income and comprehensive income using the effective interest method, except mortgage interest and fees revenue on purchased or originated credit-impaired financial assets. Mortgage interest and fees revenue include the company’s share of any fees received, as well as the effect of any discount or premium on the mortgage. Interest revenue is calculated on the gross carrying amount for mortgages receivable in Stages 1 and 2 and on the net carrying amount for mortgages receivable in Stage 3 (see Note 3(c) Financial instruments – impairment of assets). The effective interest method derives the interest rate that discounts the estimated future cash receipts during the expected life of the mortgage receivable (which is the contractual life, if a shorter period is not expected) to its carrying amount. When calculating the effective interest rate, future cash flows are estimated considering all contractual terms of the financial instrument, but not future credit losses (see Note 3(c) Financial instruments – impairment of assets). The calculation of the effective interest rate includes all fees and transaction costs paid or received. Fees and transaction costs include incremental revenues and costs that are directly attributable to the acquisition or issuance of the mortgage. Mortgage interest and fees revenue on purchased or originated credit-impaired financial assets are recognized in the consolidated statements of income and comprehensive income using the credit-adjusted effective interest rate, reflecting the expected credit losses, to the amortized cost of the financial assets from initial recognition. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 35 NOTE 3 – MATERIAL ACCOUNTING POLICY INFORMATION (continued) (e) Financial instruments – derecognition Financial assets are derecognized when the contractual rights to receive cash flows from the asset expire. When the company exercises its security and takes title to the underlying real estate, a mortgage receivable is derecognized on the date of foreclosure. Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled, or expires. (f) Investment properties Investment properties are properties over which the company has taken title through exercise of its security interest. Such properties are accounted for under IAS 40, Investment Property. An investment property is recognized on the date of acquisition through foreclosure and is measured initially at cost, which is the book value of the respective mortgage receivable net of any related allowance for mortgage losses, plus any directly attributable expenditures and transaction costs. Any costs subsequently incurred to complete the construction or development of a property are capitalized. After initial recognition, investment properties are measured using the cost model. Depreciation commences from the date the property is substantially complete and is recognized when the property’s carrying amount exceeds its residual value. The carrying value of investment properties are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment property may exceed its recoverable amount. If the higher of the fair value less cost of disposal and the value in use of an investment property (its recoverable amount) is less than its carrying amount, then an impairment loss is recognized for the excess. Any impairment loss, or gain or loss realized on disposal, is recognized in the consolidated statements of income and comprehensive income. (g) Convertible debentures Convertible debentures can be converted into common shares of the company at the option of the investor. They are compound financial instruments with two components: a financial liability, and a call option which is an equity instrument. The fair value of the liability component is measured as of the date that the convertible debentures were issued, and the equity instrument is valued on that date based upon the difference between the fair value of the convertible debenture and the fair value of the liability component. The measurement of the fair value of the liability component is based upon market rates of interest on similar debt instruments without the conversion feature. Expenses of issue are allocated between the two components on a pro-rata basis. The book value of the debt is accreted up to its face value over the life of the financial liability using the effective interest method, which applies a constant interest rate over the term of the debt. The value of the equity component is not remeasured subsequent to its initial measurement date. (h) Income taxes The company qualifies as a MIC under the ITA, and as such is not taxed on income provided that its taxable income is distributed to its shareholders in the form of dividends within 90 days after December 31 each year. It is the company’s policy to pay such dividends to remain non-taxable. Accordingly, no provision for current or deferred income taxes is required. (i) Earnings per common share Basic earnings per common share is calculated by dividing earnings during the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adjusting the income and comprehensive income attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive items such as convertible debentures and deferred share incentive plan. 36 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – MATERIAL ACCOUNTING POLICY INFORMATION (continued) (j) Share-based payments The company has an equity-settled share-based compensation plan for grants to eligible directors, officers, and senior management under its deferred share incentive plan that vest over a number of years. Grants are measured based upon the fair value of the awards granted, using the volume-weighted average trading price of the company’s common shares on the TSX for the five trading days prior to the date of the grant. (k) Deferred share unit plan The company has a cash-settled deferred share unit plan for non-executive directors pursuant to which each non-executive director is required to receive one-half of their director compensation in the form of deferred share units. Each non-executive director can elect to receive the remaining one-half of their director compensation in deferred share units or cash or a combination thereof. The deferred share units represent a financial liability as they can only be settled in cash when the non-executive directors cease to serve in any capacity with the company. As such, the deferred share units are initially recognized at their fair value, using the volume-weighted average trading price of the company’s common shares on the TSX for the five trading days prior to the last day of the reporting period, as directors’ expense with a corresponding amount recorded in accounts payable and accrued liabilities. The liability is subsequently remeasured to its fair value at each period end with the change in fair value during the period recognized as an operating expense. NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS Various pronouncements have been issued by the International Accounting Standards Board or IFRS Interpretations Committee that will be effective for future accounting periods. The company closely monitors new accounting standards as well as amendments to existing standards and assesses what impact, if any, they will have on the consolidated financial statements. None of the standards issued to date are expected to have a material effect on the consolidated financial statements. NOTE 5 – MORTGAGES RECEIVABLE (a) Mortgage portfolio As at December 31, 2023 As at December 31, 2022 Outstanding % of Outstanding % of Number 22 25 14 153 10 224 19 243 Property type High-rise residential Mid-rise residential Low-rise residential House and apartment Condominium corporation Residential portfolio Commercial Mortgage portfolio Accrued interest receivable Mortgage discount Unamortized origination fees Allowance for mortgage losses Mortgages receivable amount Portfolio Number amount $ 323,340 208,289 153,561 117,943 1,786 804,919 88,640 893,559 6,049 (68) (207) (22,600) $ 876,733 36.2% 23.3% 17.2% 13.2% 0.2% 90.1% 9.9% 100.0% 20 $ 30 14 158 12 234 26 260 $ 300,989 225,281 128,244 108,124 2,189 764,827 101,435 866,262 5,418 (94) (506) (10,706) 860,374 Portfolio 34.7% 26.0% 14.8% 12.5% 0.3% 88.3% 11.7% 100.0% The mortgage portfolio has maturity dates between 2024 and 2032 with a weighted average remaining term of 9.2 months at December 31, 2023 (December 31, 2022 – 10.9 months). The portfolio has a weighted average interest rate (which excludes lender fees earned by the company) of 11.42% as at December 31, 2023 (10.77% as at December 31, 2022). NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 37 NOTE 5 – MORTGAGES RECEIVABLE (continued) (a) Mortgage portfolio (continued) Within the mortgage portfolio, at December 31, 2023, there were 26 mortgages receivable aggregating to $187,789 (21.0% of the mortgage portfolio) in which the company has a subordinate position in a syndicated mortgage receivable (December 31, 2022 – 38 mortgages receivable aggregating to $231,318; 26.7% of the mortgage portfolio). Additional analysis of the mortgage portfolio, including by location of underlying property and type of mortgage, is set out in the “Investment Portfolio” section of the Management’s Discussion and Analysis for the year ended December 31, 2023. A majority of the mortgages receivable have an initial closed period, after which the borrower may repay the principal at any time prior to maturity, without penalty, subject to providing advance written notice according to the terms of their mortgage. Principal repayments based on contractual maturity dates are as follows: Years ending December 31, 2024 2025 2026 2027 2028 Thereafter (b) Allowance for mortgage losses $ 599,553 197,264 95,410 – – 1,332 $ 893,559 67.1% 22.1% 10.7% 0.0% 0.0% 0.1% 100.0% The gross carrying amounts of mortgages receivable and the allowance for mortgage losses by property type are as follows: As at December 31, 2023 Gross carrying amount High-rise residential Mid-rise residential Low-rise residential House and apartment Condominium corporation Commercial Mortgage portfolio Allowance for mortgage losses High-rise residential Mid-rise residential Low-rise residential House and apartment Condominium corporation Commercial Mortgage portfolio As at December 31, 2022 Gross carrying amount High-rise residential Mid-rise residential Low-rise residential House and apartment Condominium corporation Commercial Mortgage portfolio Stage 1 $ 275,271 171,586 104,368 105,009 1,786 76,809 $ 734,829 Stage 2 Stage 3 $ 48,069 $ 36,703 12,450 12,934 – 11,831 Total – $ 323,340 208,289 – 153,561 36,743 117,943 – 1,786 – 88,640 – $ 121,987 $ 36,743 $ 893,559 $ $ 3,313 2,605 1,526 830 7 1,052 9,333 $ $ 5,156 $ 1,120 49 38 – 47 6,410 $ – $ – 6,857 – – – 8,469 3,725 8,432 868 7 1,099 6,857 $ 22,600 Stage 1 $ 300,989 225,281 104,578 105,798 2,189 101,435 $ 840,270 Stage 2 Stage 3 – $ $ – 23,666 2,326 – – Total – $ 300,989 – 225,281 – 128,244 108,124 – 2,189 – – 101,435 – $ 866,262 $ 25,992 $ 38 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – MORTGAGES RECEIVABLE (continued) (b) Allowance for mortgage losses (continued) Allowance for mortgage losses High-rise residential Mid-rise residential Low-rise residential House and apartment Condominium corporation Commercial Mortgage portfolio Stage 1 3,454 $ 2,597 1,335 786 7 788 8,967 $ Total Stage 2 Stage 3 3,454 – $ – $ $ 2,597 – – 3,069 – 1,734 791 – 5 7 – – 788 – – – $ 10,706 1,739 $ $ The allowance for mortgage losses at December 31, 2023 is $22,600 (December 31, 2022 – $10,706). Of this allowance, $9,333 (December 31, 2022 – $8,967) represents management’s estimate of the ECLs on mortgages receivable in the company’s portfolio that have not experienced a significant increase in credit risk since initial recognition (Stage 1). The ECL was assessed individually for each mortgage receivable and commitment classified as Stage 2 and 3 and management estimated the ECL as $6,410 for mortgages receivable classified as Stage 2 and $6,857 for mortgages receivable classified as Stage 3 at December 31 2023 (December 31, 2022 – $1,739 and $nil, respectively). The changes in the allowance for mortgage losses are shown in the following table: Year ended December 31, 2023 Stage 1 $ 8,967 Stage 2 $ 1,739 $ Stage 3 Total – $ 10,706 Opening balance, January 1, 2023 Allowance for mortgage losses Transfers to Stage 1 (1) Transfers to Stage 2 (1) Transfers to Stage 3 (1) Net remeasurement (2) Mortgage advances Mortgage repayments Balance, December 31, 2023 $ 6,857 $ (1) Transfers between stages which are presumed to occur before any corresponding remeasurement of the allowance. (2) Net remeasurement represents the change in the expected credit loss related to changes in model inputs or assumptions, including changes in macro-economic conditions, and changes in measurement following a transfer between stages. It also includes overlay adjustments as a result of economic uncertainties. 1,677 (424) (8) (1,017) 868 (730) $ 9,333 – – – 11,773 885 (764) 22,600 (1,677) 424 (1,573) 7,517 14 (34) – – 1,581 5,273 3 – $ 6,410 During the year ended December 31, 2023, the allowance for mortgage losses for mortgages classified as Stage 1 increased due to changes in assumptions in the expected credit loss model and overlay adjustments due to economic uncertainties which were partially offset by a decrease in mortgages classified as Stage 1. The allowance for mortgage losses classified as Stage 2 increased due to a higher ECL assessment of the individual loans at year end compared to the prior year. The allowance for mortgage losses classified as Stage 3 increased due to an increase in loans classified as Stage 3. The ECL is assessed individually for Stage 2 and Stage 3 mortgages receivable. Year ended December 31, 2022 Stage 1 $ 7,458 Stage 2 $ Stage 3 Total 2,803 $ 10,439 178 $ Opening balance, January 1, 2022 Allowance for mortgage losses Transfers to Stage 1 (1) Transfers to Stage 2 (1) Transfers to Stage 3 (1) Net remeasurement (2) Mortgage advances Mortgage repayments Write-off Balance, December 31, 2022 (1) Transfers between stages which are presumed to occur before any corresponding remeasurement of the allowance. (2) Net remeasurement represents the change in the expected credit loss related to changes in model inputs or assumptions, including changes in macro-economic conditions, and changes in measurement following a transfer between stages. It also includes overlay adjustments as a result of economic uncertainty. – – – 1,544 2,210 (1,840) (1,647) − $ 10,706 2 (84) – 1,072 2,210 (1,691) − $ 8,967 (2) 84 – 1,628 – (149) − $ 1,739 $ (1,647) (1,156) – – – – – NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 39 NOTE 5 – MORTGAGES RECEIVABLE (continued) (b) Allowance for mortgage losses (continued) During the year ended December 31, 2022, the allowance for mortgage losses for mortgages classified as Stage 1 increased due to an increase in the mortgage portfolio balance as well as changes in assumptions in the expected credit loss model and overlay adjustment due to economic uncertainties. The allowance for mortgage losses classified as Stage 2 increased due to a higher ECL assessment of the individual loans at year end compared to the prior year. The allowance for mortgage losses classified as Stage 3 decreased due to the partial repayment and write-off of a loan classified as Stage 3. The ECL is assessed individually for Stage 2 and Stage 3 mortgages receivable. Generally, the company continues to seek recovery on amounts that were written off during the reporting period, unless the company no longer has the right to collect or has exhausted all reasonable collection efforts. During the second quarter of 2022, the company wrote off $1,647 on one loan previously provided for and included in the Stage 3 allowance for mortgage losses. The company negotiated a settlement agreement with the borrower and guarantors on this loan that provides for a recovery over time of the amount written off. This settlement agreement has been accounted for as an originated credit-impaired financial asset. NOTE 6 – INVESTMENT PROPERTIES AND INVESTMENT PROPERTY HELD FOR SALE Years ended December 31 2023 Investment property 2022 Investment property Balance, beginning of year Impairment Reclassification1 Disposition Balance, end of year (1) Reclassification included cumulative impairment of $2,638. Investment held for properties sale $ 14,302 – – (13,201) $ 1,101 $ $ – – – – – Total $ 14,302 – – (13,201) $ 1,101 Investment held for properties sale $ 1,101 – 13,201 – $ 14,302 $ 15,033 (1,832) (13,201) – – $ Total $ 16,134 (1,832) – – $ 14,302 Investment properties consist of a four unit property in Leduc, Alberta. During the year ended December 31, 2023, the value in use was estimated using available market evidence and comparable transactions. During the year ended December 31, 2023, the company sold the 90 unit property in Regina, Saskatchewan. Net sales proceeds were $13,275 resulting in a gain on disposition of $74. During the year ended December 31, 2022, the company made the decision to delist the 90 unit property in Regina, Saskatchewan from the sales market due to a higher than usual vacancy rate at the beginning of the period and to allow for the completion of maintenance work on the property. After considering the above and other real estate transactions under negotiation in Regina, Saskatchewan at that time, as well as, the economic conditions in Saskatchewan, the company estimated that the carrying value of the Regina, Saskatchewan property exceeded its recoverable amount by $1,832, an impairment was recognized, and the Regina, Saskatchewan property was reclassified as investment property at its carrying value of $13,201. The value in use was estimated using a third-party valuation that considered a net operating income analysis, including estimates of gross rental income, vacancy rates, operating and management expenses and capitalization rates, as well as, available market evidence and comparable transactions. Rental income Revenue Gain on disposition of investment property Property operating costs Rental income Years ended December 31 2022 2023 $ $ 903 74 (343) 634 $ $ 1,181 − (673) 508 40 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – CREDIT FACILITY At December 31, 2023, the company had a credit facility from a syndicate of five Canadian financial institutions of $315,000 (December 31, 2022 – $315,000) at a formula rate that varies with bank prime and the market bankers’ acceptance rate. On August 28, 2023, the company entered into an amendment to its existing credit facility in order to, among other things, extend the maturity date, increase the accordion from $35,000 to $60,000, and favourably amend the financial covenants. At any time during the term of the credit facility, the company has the right to increase the credit facility by up to an additional $60,000 (such that the total maximum availability would be up to $375,000). Drawings under the credit facility may be by way of a bank loan (including an overdraft facility of up to $5,000 (December 31, 2022 – $5,000)), bankers’ acceptances or letters of credit (LCs). LCs represent irrevocable assurances that the company’s banks will make payments in the event that a borrower of the company cannot meet its obligations to third parties. LCs carry the same credit risk, recourse and collateral security requirements as mortgages extended to customers. The committed credit facility was effective December 1, 2020, has a term to July 31, 2025, and is subject to certain conditions of drawdown and other covenants. The credit facility is secured by a lien over all of the company’s assets by means of a general security agreement. The amount that may be drawn down under the credit facility is determined by the aggregate value of mortgages receivable that are acceptable to the lender. At December 31, 2023, the maximum balance available to be drawn on the credit facility was $315,000 (December 31, 2022 – $315,000). Under the terms of the credit facility, covenants must be met in respect of shareholders’ equity, debt to total assets and interest coverage. At December 31, 2023 and December 31, 2022, the company was in compliance with these covenants. The annualized weighted average interest rate for the year ended December 31, 2023 was 7.19% (4.57% for the year ended December 31, 2022). As at December 31 Credit facility Bankers’ acceptances Bank loan Overdraft facility Unamortized and prepaid financing costs 2022 $ 210,000 11,000 2,959 (965) 222,994 12,158 $ 235,152 (1) $601 of cash was received, and is recorded in accounts payable and accrued liabilities, for letters of credit on mortgages that are 2023 $ 205,000 11,000 2,281 (1,292) 216,989 12,171 $ 229,160 Borrowings under credit facility Total credit facility utilization Letters of credit(1) discharged (December 31, 2022 – $3,551). Interest on the credit facility is included in financing costs and calculated using the effective interest method. Included in interest and other financing charges for the year ended December 31, 2023 is interest on the credit facility of $15,129 (December 31, 2022 – $9,463) and bank fees and amortization of financing costs of $423 (December 31, 2022 – $491). NOTE 8 – RELATED PARTY TRANSACTIONS The company pays mortgage servicing and management fees to Canadian Mortgage Capital Corporation (CMCC), which is the manager of the company, and responsible for its day-to-day management. The majority beneficial owner and Chief Executive Officer (CEO) of the manager is also CEO of the company. During the year ended December 31, 2023, the company incurred mortgage servicing and management fees of $8,379 (year ended December 31, 2022 – $7,977). The management agreement between the company and CMCC contains provisions for the payment of termination fees to the manager in the event that the management agreement is terminated in certain circumstances. Amounts due to related party of $1,320 (December 31, 2022 – $717) are included in accounts payable and accrued liabilities and are due to CMCC, are in the normal course of business, are non-interest bearing, due on demand and are paid within 30 days of each period end. During the year December 31, 2023, CMCC reimbursed the company for share-based payments (see Note 11 – Share-based payments). NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 41 NOTE 8 – RELATED PARTY TRANSACTIONS (continued) Under an employee share purchase plan (ESPP) for the company’s common shares, participants, including employees of CMCC, may contribute up to an annual maximum to the ESPP and CMCC matches 50% of the participants’ contributions. The total amount matched by CMCC for the year ended December 31, 2023 was $69 (year ended December 31, 2022 – $64). Certain of the company’s mortgages receivable are shared with other investors. As at December 31, 2023, companies owned by a director and/or officer of the company were not co-invested in any syndicated mortgages receivable (December 31, 2022 – one syndicated mortgage receivable of $22,000, of which the company’s share was $21,000, of which $19,750 had been funded). As at December 31, 2023, the company had nil mortgages receivable (December 31, 2022 – two) from borrowers over which a director and/or officer of the company has joint control, with the company’s share of the gross commitments totaling $nil (December 31, 2022 – $9,200), of which $nil had been funded at December 31, 2023 (December 31, 2022 – $8,350). During the year ended December 31 2023, the company recognized net mortgage interest and fees of $377 (year ended December 31, 2022 – $1,428) from two (December 31, 2022 – four) mortgages receivable from borrowers over which a director and/or officer of the company has joint control. Key management includes directors and officers of the company. Compensation expenses for key management personnel include: Years ended December 31 2023 2022 Directors’ fees (1) (Note 12) Share-based payments to directors (Note 11) Share-based payments to officers (Note 11) 255 128 92 475 (1) The cumulative adjustment for the fair value of deferred share units issued under the deferred share unit plan was $(112) as at 284 145 80 509 $ $ $ $ December 31, 2023 (year ended December 31, 2022 – $(83)) (see Note 12 – Deferred Share Unit Plan). Related party transactions are in the normal course of business and are recorded at the amount of consideration established and agreed to by the related parties. NOTE 9 – CONVERTIBLE DEBENTURES Year ended December 31, 2023 Issued and outstanding face value Book value – Convertible debentures, beginning of year Accretion for the year Convertible debentures, 5.10% AI.DB.G $ 40,250 5.00% AI.DB.F $ 34,500 Convertible debenture 5.60% AI.DB.E AI.DB.D.A $ 28,750 6.5.50%5% .5.30% AI.DB.C $ 25,300 $ 34,500 Total $ 163,300 $ 37,194 473 $ 32,006 403 $ 28,108 283 $ 33,683 270 $ 24,973 217 $ 155,964 1,646 end of year $ 37,667 $ 32,409 $ 28,391 $ 33,953 $ 25,190 $ 157,610 Year ended December 31, 2022 Issued and outstanding face value Book value – Convertible debentures, beginning of year Issued Equity component Issue costs Issue costs attributed to equity component Accretion for the year Convertible debentures, end of year 5.10% AI.DB.G $ 40,250 5.00% AI.DB.F $ 34,500 Convertible debenture 5.60% AI.DB.E AI.DB.D.A $ 28,750 $ 34,500 6.5.50%5% .5.30% AI.DB.C $ 25,300 Total $ 163,300 $ – 40,250 (1,640) (1,861) $ 31,608 – – – $ 27,827 – – – $ 33,416 – – – $ 24,758 – – – $ 117,609 40,250 (1,640) (1,861) 76 369 – 398 – 281 – 267 – 215 76 1,530 $ 37,194 $ 32,006 $ 28,108 $ 33,683 $ 24,973 $ 155,964 42 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 – CONVERTIBLE DEBENTURES (continued) On March 18, 2022, the company completed a public offering of 5.10% convertible debentures for gross proceeds of $35,000. On March 23, 2022, the company received gross proceeds of $5,250 from the exercise in full of the over-allotment option on the 5.10% convertible debentures. Convertible debenture Maturity date Initial term Conversion at option of shareholder at: Interest payments date: Redeemable at the company’s option at par plus accrued interest, provided the weighted average trading price of common shares is not less than 125% of conversion price from: to: Redeemable at the company’s option at par plus accrued interest and unpaid interest after: 5.10% 5.00% AI.DB.G AI.DB.F March 31, 2029 Dec. 31, 2028 7 years 7 years 5.60% AI.DB.E March 31, 2025 6 years 5.50% AI.DB.D Dec. 31, 2025 7 years 5.30% AI.DB.C June 30, 2024 7 years $16.75/share March 31, Sept. 30 $17.50/share June 30, Dec. 31 $14.75/share March 31, Sept. 30 $15.60/share June 30, Dec. 31 $14.94/share June 30, Dec. 31 March 31, 2025 Dec. 31, 2024 March 31, 2027 Dec. 31, 2026 March 31, 2022 March 31, 2024 Dec, 31, 2021 Dec. 31, 2023 June 30, 2020 June 30, 2022 March 31, 2027 Dec. 31, 2026 March 31, 2024 Dec. 31, 2023 June 30, 2022 Interest costs related to the convertible debentures are recorded in financing costs using the effective interest method and consist of the following: Coupon rate interest on convertible debentures Accretion and other costs Interest on convertible debentures NOTE 10 – SHARE CAPITAL Years ended December 31 2023 $ $ 8,626 1,666 10,292 2022 8,174 1,547 9,721 $ $ The company is authorized to issue an unlimited number of common shares without par value. Common shares rank equally with each other and have no preference, conversion, exchange or redemption rights. Common shares participate pro-rata with respect to any dividends paid, including distributions upon termination and dissolution. The company has an optional dividend reinvestment plan (DRIP) for shareholders, whereby participants may reinvest cash dividends in additional common shares of the company at the volume-weighted average price for five days prior to distribution, less a 2% discount. During the year ended December 31, 2023, 631,187 common shares were issued under the company’s DRIP (year ended December 31, 2022 – 470,927), using reinvested dividends of $6,969 (year ended December 31, 2022 – $5,666). Shares issued under the DRIP are issued by the company from treasury. On June 16, 2022, the company announced that the TSX had accepted a notice filed by the company of its intention to make a normal course issuer bid (NCIB) with respect to its common shares. The notice provides that the company may purchase up to 3,000,000 common shares during the twelve month period commencing June 24, 2022 and ending on June 23, 2023. On June 13, 2023, the company announced that the TSX had approved renewal of the NCIB to purchase up to 4,176,336 common shares during the twelve month period commencing June 24, 2023 and ending on June 23, 2024. During the year ended December 31, 2023, the company purchased 37,527 common shares under the NCIB (year ended December 31, 2022 – nil) for a total cost of $378 (year ended December 31, 2022 - $nil). Under the ESPP, each participant may contribute up to an annual maximum to the ESPP, and CMCC matches 50% of the participant’s contribution. Thus, the company does not bear any of the cost of the ESPP, as it is reimbursed by CMCC and the participants. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 43 NOTE 11 – SHARE-BASED PAYMENTS Grants are provided to directors and certain employees of the manager under the company’s deferred share incentive plan (DSIP). The DSIP units vest annually over three years. Common shares are issued to participants on the vesting date of each tranche of the DSIP units, unless a participant elects to defer the issuance. In addition, income deferred share incentive plan (IDSIP) units are credited to holders of DSIP units granted before 2017 based upon dividends paid on common shares. The fair value of share-based compensation was based upon the volume-weighted average market price of the common shares five days prior to the grant dates of September 1, 2023 ($11.17) and September 29, 2023 ($10.71), September 1, 2022 ($13.31) and August 11, 2022 ($11.92). Balance, beginning of year Units granted Units earned Units cancelled Common shares issued Balance, end of year Share-based payments expense: Years ended December 31 DSIP units 87,566 30,950 – – (17,116) 101,400 2023 IDSIP units 10,368 – 2,434 – – 12,802 DSIP units 82,983 41,000 – (567) (35,850) 87,566 2022 IDSIP units 13,636 – 2,496 – (5,764) 10,368 Total 96,619 41,000 2,496 (567) (41,614) 97,934 Total 97,934 30,950 2,434 – (17,116) 114,202 Years ended December 31 2023 2022 $ $ September 29, 2023 grant(1) September 1, 2023 grant September 1, 2022 grant August 11, 2022 grant(1) September 2, 2021 grant September 1, 2020 grant September 3, 2019 grant September 1, 2016 grant September 1, 2015 grant September 1, 2014 grant August 30, 2013 grant – – 64 – 165 53 22 8 10 10 4 336 (1) During the year ended December 31, 2023, CMCC reimbursed the company for share-based expenses of $113 related to grants – 58 164 – 74 18 – 4 10 9 4 341 $ $ under the company’s DSIP (year ended December 31, 2022 – $42). NOTE 12 – DEFERRED SHARE UNIT PLAN The board of directors established a deferred share unit plan (DSUP) effective January 1, 2020 pursuant to which each non-executive director is required to receive one-half of their director compensation in the form of deferred share units (“DSUs”). Each non-executive director can elect to receive the remaining one-half of their director compensation in DSUs or cash or a combination thereof. DSUs are credited to the director DSUP accounts quarterly, in arrears, in an amount equal to the non- executive director’s remuneration elected to be paid in DSUs divided by the fair value of the common shares on the last day of the quarter. The fair value is equal to the volume-weighted average trading price of the company’s common shares on the TSX for the five trading days immediately preceding that day. Dividend equivalents are credited to a non-executive director’s DSUP account as if dividends were paid on each DSU held by a non-executive director on the dividend record date and reinvested in additional DSUs at the fair value on the dividend payment date. DSUs can only be exercised when the non-executive director ceases to serve in any capacity with the company. Payment will be made, at the election of the non-executive director, in either cash or common shares of the company purchased in the market, net of applicable taxes or other amounts required to be withheld or deducted, based on the fair value of the company’s common shares on or about the date of the payment. Amounts owed in relation to this plan of $932 (December 31, 2022 – $642) are included in accounts payable and accrued liabilities. DSU compensation expense is recognized in directors’ expense, dividends earned on outstanding DSUs are recognized in interest and other financing charges and the adjustment to fair value of units issued under the DSUP is recognized as an operating expense. 44 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 – DEFERRED SHARE UNIT PLAN (continued) Directors’ fees paid in DSUs Dividends on DSUs Adjustment to fair value of DSUs Outstanding DSUs, beginning of year Granted Reinvested Balance, end of year NOTE 13 – EARNINGS PER SHARE Basic earnings per share – Numerator Net income and comprehensive income for the year Denominator Weighted average common shares outstanding Basic earnings per share Years ended December 31 2023 241 79 (29) 291 $ $ 2022 219 45 (160) 104 $ $ Years ended December 31 2023 60,358 21,876 6,991 89,225 2022 38,080 18,663 3,615 60,358 Years ended December 31 2023 2022 $ 51,485 $ 46,332 43,693,240 1.18 $ 43,057,886 1.08 $ Diluted earnings per share – Numerator Net income and comprehensive income for the year Interest on convertible debentures Net income and comprehensive income for diluted earnings per share $ Denominator Weighted average common shares outstanding Convertible debentures Deferred share incentive plan Income deferred share units Weighted average common shares outstanding – diluted basis Diluted earnings per share $ 51,485 10,292 61,777 43,693,240 10,228,549 92,392 11,721 54,025,902 1.14 $ $ $ 46,332 9,721 56,053 43,057,886 9,717,324 83,022 12,949 52,871,181 1.06 $ NOTE 14 – FINANCIAL INSTRUMENTS (a) Classification of financial instruments Financial assets comprise mortgages receivable and are classified and measured at amortized cost. Financial liabilities comprise borrowings under credit facility, accounts payable and accrued liabilities, dividends payable, accrued convertible debenture interest and the liability component of convertible debentures. The liability for the deferred share unit plan, included in accounts payable and accrued liabilities, is measured at FVTPL. All other financial liabilities are measured at amortized cost. (b) Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between arm’s length market participants at the measurement date. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 45 NOTE 14 – FINANCIAL INSTRUMENTS (continued) (b) Fair value (continued) • Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data or other means. • Level 3 inputs are unobservable (supported by little or no market activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. All financial assets are classified and measured at amortized cost. Their carrying values approximate their fair values due to their relatively short-term maturities and due to the fact that the majority of the mortgages receivable have floating interest rates. The fair value of borrowings under credit facility approximates book value since it bears interest at floating rates. The accounts payable and accrued liabilities, excluding the liability for the deferred share unit plan, dividends payable and accrued convertible debenture interest carrying values approximate their fair values due to the short-term nature of the items. The liability for the deferred share unit plan is measured at fair value using Level 1 inputs. The deferred share units are measured at fair value on the day they are credited to the directors’ DSUP accounts, with fair value equal to the volume-weighted average trading price of the company’s common shares on the TSX for the five trading days immediately preceding that day, and are remeasured using fair value at each reporting date. The fair value of convertible debentures at the time of issue is established using Level 2 inputs. The fair value of convertible debentures has been determined based on the closing prices of the convertible debentures on the TSX on the respective dates. Convertible debentures Fair value Less book value of equity component Years ended December 31 2023 $ 146,408 (3,786) $ 142,622 2022 $ 144,982 (3,786) $ 141,196 Book value of financial liability component $ 157,610 $ 155,964 (c) Credit risk Mortgages receivable and issued letters of credit are exposed to credit risk. Credit risk is the risk that a counterparty to a financial instrument will fail to discharge its obligation or commitment, resulting in a financial loss to the company. The maximum exposure to credit risk related to mortgages receivable, including letters of credit outstanding, at December 31, 2023 is $889,179 (December 31, 2022 – $873,132). The company mitigates the credit risk by maintaining strict credit policies including due diligence processes, credit limits, documentation requirements, review and approval of new and renewed mortgages receivable by the board of directors or a subgroup thereof, quarterly review of the entire portfolio by the board of directors, and other credit policies approved by the board of directors. Credit risk is approved by the board of directors. These credit policies and processes have been consistently applied throughout the two year period ended December 31, 2023. All mortgages receivable are secured by the underlying real estate, plus other credit enhancements, which may include guarantees from the borrowers, personal guarantees from the borrower’s shareholder(s) and/or cross guarantees from related entities. The quality of the mortgage collateral is primarily driven by the location and type of underlying property and type of mortgage receivable. For further information, refer to Note 5(a) – Mortgage portfolio and to the “Investment Portfolio” section of the Management’s Discussion and Analysis for the year ended December 31, 2023. Management continuously monitors real estate values to ensure that the quality of the collateral underlying the remaining mortgage portfolio remains adequate. At December 31, 2023, the largest borrower group accounted for 6.82% of the mortgage portfolio (December 31, 2022 – 5.74%). See Note 5(a) – Mortgage portfolio and Note 5(b) – Allowance for mortgage losses for a breakdown of mortgages receivable and the allowance for mortgage losses by property type. 46 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 2023 • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 – FINANCIAL INSTRUMENTS (continued) (d) Liquidity risk Liquidity risk is the risk that the company will not be able to meet its obligations when due. The primary sources of liquidity risk are the requirements to fund commitments for new mortgages, advances on existing mortgages receivable, as well as obligations under the company’s credit facility. The company’s liquidity risk is managed on an ongoing basis in accordance with the policies and procedures in place that reduce the risk to an acceptable level. Policies and procedures include continuous monitoring of expected cash flows, reviewing credit requirements with the company’s bankers, issuing convertible debentures or common shares in the public markets from time to time as required, and staggering the maturities of convertible debentures when they are issued. From time to time, the company has arranged temporary increases in its credit facility with its banks in order to manage liquidity requirements, and expects to be able to continue to do so in the future if required. The company’s significant financial liabilities include borrowings under credit facility, accounts payable and accrued liabilities, dividends payable, accrued convertible debenture interest and the liability component of convertible debentures. The borrowings under credit facility are drawn upon as required to discharge accounts payable and accrued liabilities, fund loan activity, as well as to pay out dividends on a monthly basis. The company’s agreement with the lender is that the operating line will not be called provided that all covenants are met and that any significant excess cash is used to pay down the borrowings under credit facility. As at December 31, 2023, management considers that it has adequate procedures in place to manage liquidity risk. As at December 31, 2023 Borrowings under credit facility(1) Accounts payable and accrued liabilities(2) Accrued convertible debenture interest Dividends payable Convertible debentures(3) Total Unadvanced mortgage commitments(4) Carrying value $218,281 Contractual cash flow $243,741 Within 1 year 1 to 3 years $ 16,080 $227,661 3 to 5 years $ – More than 5 years $ – 4,109 4,109 4,109 – – 916 16,047 157,610 396,963 916 16,047 175,550 440,363 916 16,047 92,731 129,883 – – 42,056 269,717 – – 40,763 40,763 – – – – – – $396,963 39,231 – $479,594 $169,114 $269,717 39,231 – $40,763 – $ – Total contractual liabilities Notes: (1) Includes interest assuming the outstanding balance is not repaid until maturity on July 31, 2025. (2) For purposes of contractual cash flows, the DSUs owing to non-executive directors are assumed to be repaid within the fourth quarter of 2023. (3) The 5.30% debentures are assumed but not required to be repaid in the first quarter of 2024; 5.50% debentures are assumed but not required to be repaid in the first quarter of 2024; 5.60% debentures are assumed but not required to be repaid March 31, 2024; 5.00% debentures are assumed to be repaid December 31, 2026; and the 5.10% debentures are assumed but not required to be repaid March 31, 2027. (4) Unadvanced mortgage commitments include additional funds on existing mortgages receivable and new mortgage commitments. The experience of the company has been that a portion of the unadvanced amounts on existing mortgages receivable will never be drawn. (e) Interest rate risk The company is exposed to interest rate risk in that an increase in interest rates will result in increased interest expense due to its borrowings under credit facility being set at a variable rate and mortgages receivable are set at a combination of fixed and floating rates. The financial structure of the company results in relatively moderate interest rate risk because the majority of the company’s financing is through common shares and convertible debentures, with a moderate amount of borrowings under the credit facility that bear floating interest rates. If interest rates on debt had been one percentage point higher (lower) during the year ended December 31, 2023, income and comprehensive income would have been reduced (increased) by approximately $2,048 during the year, assuming that no changes had been made to the interest rates at which new mortgage loans were entered into. However, if new mortgage loans had been entered into at higher (lower) interest rates, the resulting reduction of income and comprehensive income would have been less than (greater than) $2,048. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • 2023 • ATRIUM MORTGAGE INVESTMENT CORPORATION • 47 NOTE 14 – FINANCIAL INSTRUMENTS (continued) (f) Currency risk Currency risk is the risk that the value of financial assets and financial liabilities will fluctuate due to changes in foreign exchange rates. The company is not exposed to currency risk as all financial assets and financial liabilities are denominated in Canadian funds. NOTE 15 – CAPITAL MANAGEMENT The company defines capital as total debt plus shareholders’ equity, as shown below: Borrowings under credit facility Convertible debentures Total debt Shareholders’ equity Capital employed As at December 31 2023 $ 216,989 157,610 374,599 482,206 $ 856,805 2022 $ 222,994 155,964 378,958 475,564 $ 854,522 The company’s objectives for managing capital are to preserve shareholders’ equity, provide shareholders with stable dividends, and to use leverage in a conservative manner to improve return to shareholders. The company finances growth of its portfolio by issuing common shares and debt. In addition, a small amount of equity is raised every month through the employee share purchase plan and through a dividend reinvestment plan for shareholders. As bank borrowings increase, the company could expect to raise further funds through public offerings of convertible debentures or common shares, and through private placements of debt. The borrowings under credit facility are subject to external covenants as set out in Note 7 – Credit facility. There has been no change in the company’s capital management objectives since the prior year. NOTE 16 – SUBSEQUENT EVENTS On January 12, 2024, the company issued 45,287 common shares ($471) to shareholders under its dividend reinvestment plan. On February 13, 2024, the company issued 42,816 common shares ($475) to shareholders under its dividend reinvestment plan. (cid:3) Corporate Directory Board of Directors Mark L. Silver Chair of the Board, Atrium Mortgage Investment Corporation President, Optus Capital Corporation Robert G. Goodall CEO, Atrium Mortgage Investment Corporation Peter P. Cohos 1,4 President, Copez Properties Ltd. Robert H. DeGasperis President, Metrus Properties Inc. Andrew Grant 4 President, PCI Holdings Corp. Maish Kagan 2 President, Canal Group Nancy H. O. Lockhart 2, 3 Director, George Weston Ltd. Director, Choice Properties REIT Jennifer Scoffield, CPA, CA Director, Dream Industrial REIT 1. Chair of Audit Committee 2. Member of Audit Committee 3. Chair of Compensation, Nominating and Governance Committee 4. Member of Compensation, Nominating and Governance Committee Auditors Crowe Soberman LLP 1100 - 2 St. Clair Ave. E Toronto, ON M4T 2T5 T. (416) 964-7633 Share Listing Common shares, TSX: AI Convertible debentures 5.30%, TSX: AI.DB.C Convertible debentures 5.50%, TSX: AI.DB.D Convertible debentures 5.60%, TSX: AI.DB.E Convertible debentures 5.00%, TSX: AI.DB.F Convertible debentures 5.10%, TSX: AI.DB.G Management Robert G. Goodall CEO Richard Munroe President and COO John Ahmad, CPA, CA CFO and Corporate Secretary Bram Rothman Managing Director - Ontario Phil Fiuza Managing Director - National Accounts, Residential Marianne Dobslaw Managing Director - British Columbia Transfer Agent Computershare Trust Co. of Canada 100 University Ave. 9th Floor, North Tower Toronto, ON M5J 2Y1 T. (800) 564-6253 For Convertible Debentures TSX Trust Company 2001 Robert-Bourassa Blvd, Suite 1600 Montreal, QC H3A 2A6 20 Adelaide Street East - Suite 900 Toronto, Ontario M5C 2T6 T. 416 867 1053 F. 416 867 1303 W. info@atriummic.com 

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