Quadra Realty Trust, Incorporated Q3 2007 Earnings Call Transcript

| About: Quadra Realty (QRR)

Quadra Realty Trust, Inc. (QRR) Q3 2007 Earnings Call November 13, 2007 9:00 AM ET

Executives

Evan Smith - Investor Relations and Media

Evan Denner - President and CEO

Steve Sherwyn - Chief Financial Officer and Treasurer

Analysts

James Shanahan - Wachovia Capital Markets

Douglas Harter - Credit Suisse

Marsella Martino - Keybanc Capital Markets

David Boardman - Wachovia Capital Markets

Operator

Good morning. My name is April, and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Quadra Realty Trust Third Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any backgroundnoise. After the speaker's remarks, there will be a question-and-answersession. (Operator Instructions)

Thank you. Mr. Smith, you may begin your conference.

Evan Smith

Thank you. Good morning everyone and welcome to the thirdquarter 2007 earnings call for Quadra Realty Trust. On the call from managementtoday is Evan Denner, President and CEO, and Steven Sherwyn, Chief FinancialOfficer.

Before we begin, I would like to inform everyone thatcertain statements in this conference call may constitute forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, including statements regarding the company's business prospects andanticipated investment performance.

These statements represent the company's beliefs regardingthe future events, many of which by their nature inherently uncertain andoutside the company's control.

It is possible though that the company's actual results andfinancial condition may differ possibly materially from the anticipated resultsand financial condition the company indicated in these forward-lookingstatements.

For discussion of some of the risks and important factorsthat could effect the company's future results, see a section called RiskFactors in the company's prospectus dated February 14, 2007, which is availableon the company's website at www.quadrarealty.com.

You should not place undue reliance on any forward-lookingstatements contained in this morning's call. The company can give no assurancethat expectations of any forward-looking statements will be obtained. Suchforward-looking statements speak only as of the date of today's call.

The company expressly disclaims any obligation to releasepublicly any updates or revisions to any forward-looking statements containedherein to reflect any change in the company's expectations with regard theretoany change in events, conditions or circumstances on which any statement isbased.

Also during today's conference call the company will discussnon-GAAP financial measures as defined by SEC regulations.

The GAAP financial measures most directly comparable to eachnon-GAAP financial measure discussed and the reconciliation of the differencesbetween each non-GAAP financial measure and the comparable GAAP financialmeasure can be found on the company's website www.quadrarealty.com by selecting thepress release regarding the company's third quarter earnings.

With that said, I would like to turn the call over toQuadra's President, Chief Executive Officer, Evan Denner. Evan?

Evan Denner

Thanks, Evan. Good morning, everyone and thank you for beingon the call with us this morning to discuss our third quarter 2007 results.We’re certainly leaving in very interesting times. As everyone is aware thevolatility in the credit markets continues to present challenges to all marketparticipants and we are no exception.

Nevertheless, Quadra in the third quarter has deliveredstrong financial results, which Steve Sherwyn, our CFO will review with you ina few minutes. But before we discuss our third quarter results I would like tostress three key points.

First, we have absolutely no direct exposure to the subprimesector, second, during the third quarter the portfolio continue to perform asunder in and third, our cash position at the end of third quarter wasapproximately $34 million and with subsequent events I will describe later nowstands at approximately $55 million. Let me briefly expand on these points.

Let me say again that we have no direct exposure to thesubprime sector. As you know, the deterioration in the subprime market cause byrelax underwriting and credit standards has lead to a disruption in the creditmarkets for a number of months now, which started as a bluff in the market hasnow become a full blown global disruption.

Unfortunately relax underwriting standards were not limitedto the subprime sector and we began to see similar developments in parts of thecommercial sector. However, we and our manager never relaxed our credit andunderwriting standards.

We are a credit first company that understands the bricksand sticks of commercial real estate. Our manager has been an active portfoliolender, which has historically held and continues to hold significant positionsto maturity in the loans it originates.

We believe firmly that a whole to maturity business model isvery different from a trading or arbitrage model and leads to a strong emphasison discipline underwriting and credit risk management.

This experience is crucial in the times and markets in whichwe find ourselves today. Frankly, hindsight suggest that our credit culture andbusiness discipline will prove to have been a critical importance during thepast 12 to 18 months when the real estate credit underwriting among some marketparticipants become increasing aggressive and unsustainable.

We would expect that spreads and leverage levels willovertime return to more attractive risk adjusted levels for real estate lendersand provide lenders by Quadra who maintain credit discipline and preservecapital during the period of easy capital, attractive investment opportunities.

The strength of our underwriting is reflected in ourportfolio. As of September 30, 2007, we held investments and loans ofapproximately $654 million net of un-amortize upfront fees, premiums, discountsand cost and inclusive of the loans available for sale.

At the end of the quarter total commitments were just over$1 billion with a total outstanding balance of approximately $662 millionconsisting of 35% condominium construction, 16% residential, 16% retail, 11%land, 7% hotel, 7% office, 5% other and 3% mixed use. With 75% first mortgageloans and 25% in mezzanine loans. This includes outstanding balances andcommitments related to loans available for sale.

The variable rate investments carry an effective weightedaverage yield over LIBOR of 286 basis points based on the amounts drawn on suchcommitments. Our fixed rate investments carry weighted average effective yieldof 7.89% based on the amounts outstanding as of September 30, 2007.

In terms of geographic exposure at the end of the quarter wehad 45% exposure in New York, followed by Florida at 14%, Nevada 11%, Marylandat 7%, Colorado at 5%, Hawaii at 5%, Arizona at 5%, Massachusetts at 3%,California at 3% and other states at 2%.

I would like to mention that while we do have a number ofcondominium construction loans in our portfolio. We believe that each projectfor one or more reasons nationally recognized sponsorship, strong sub-markets,anticipate a completion day, low loan to value ratio, low and purchaser basis,unique locations analog brands will continue to perform as under room.

We continue to believe underline fundamentals in the realestate sector remain positive albeit with some volatility due to the near-termdisruption in the credit markets.

As of the end of the quarter, Quadra had no impaired loansand had taken no loans mass reserves. Let me reiterate, our portfolio was builton strict underwriting standards, which never waived even in the way ofdeterioration in standards among some market participants.

As a result despite these market conditions our portfoliocontinues to perform as or better than anticipated. Of course, even those of uswho have maintained strict underwriting standards have a strong portfolio andwho had no direct exposure to the subprime market or not completely amuse fromthe spill over effects of the subprime market in the refinancing market.

Concerns about the residential mortgage market have spreadto include almost all areas of the debt capital markets, including corporatebonds, assets backed securities and commercial real estate.

This continues to cause significant disruption in the CDOmarket and the CMBS market and has lead to concerns that mortgage REITs mayface increasing margin cost and/or diminish availability under their warehouselines.

We cannot pursue when the commercial real estate CDO marketwill stabilize and do not believe that we can successfully enter into acommercial real estate CDO transaction on terms acceptable to us in anear-term. Due to the current market conditions, the company is exploringacceptable financing alternatives to further support our growth potential.

We have likewise taken a very cautious position in deployingcapital over the past few months and we anticipate that this will continuethrough the end of the year. The market is resetting itself on almost a dailybasis.

We believe that this period of disruption may presentattractive opportunities for us in a future and as the market adjusts in awakeof the current disruption we will judiciously deploy resources and capital inorder to be able to take advantage of these attractive opportunities as theyarise.

To this end, we decided to make five of our seniorconstruction loans available for sale, which will increase our overallliquidity and flexibility. As of September 30, 2007 the aggregate fundings forthe five loans available for sale was $150 million or $113.9 million net ofun-amortized fees.

As of the date the reclassification September 30, 2007, wecompleted an aggregate fair value and based impart upon indications ofinterest, we anticipated being able to sell this assets for approximate theaggregate carrying value.

In addition unfunded loan commitment associated with thesefive loans were approximately $154.3 million, the sales were reduce ouroutstanding commitments providing us with additional flexibility.

I am please to report that subsequent to the end of thequarter, we sold a $125 million commitment in one of the five loans at anominal profit. This sale has increased our liquidity position by approximately$90 million we now have approximately $55 million in cash available.

I would like to emphasize that while we are pleased with thestrength of our portfolio, we understand the need to diversify our portfolio byasset type, asset class and geography. And create the necessary liquidity andflexibility to take advantage of market opportunities as they may arise.

With that said, I would now like to turn the call over toSteve, who will provide you with details of our third quarter financialresults. Steve?

Steve Sherwyn

Thank you, Evan. Good morning. As Evan stated, our thirdquarter results reflect the strength of our business, which enables us todeliver strong net income and enhance returns to our shareholders. Now, let mewalk you through our financial results for the third quarter ended September30, 2007.

The company generated total revenues net of interest expenseof approximately $9.5 million during the quarter. The interest expense of $5.9million for the third quarter reflect average borrowings of approximately $325million and the weighted average spread over LIBOR of a 135 basis points as ofquarter end.

Other expenses incurred during the quarter totaledapproximately $2.8 million in consistent of management fee and overhead costsof $1.9 million, general administrative expenses of $866,000 and $63,000 ofnon-employee stock-based compensation.

These expenses were essentially flat compared to $2.8million that we incurred in second quarter of 2007, which include managementfees and overhead costs of $1.8 million general and administrative expenses of$845,000.

The company is pleased to report net income available tocommon shareholders of approximately $6.7 million or $0.26 per diluted sharefor the quarter ended September 30, 2007.

Funds from operations or FFO for the quarter were also $6.7million or $0.26 per share. AFFO for the quarter was approximately $6.8 millionor $0.26 per shares. The only difference being, non-cash equity compensation.

As our investment activities were initiated on February 21,2007, there are no comparable financial results from the third quarter of theprior year.

Moving to our liquidity as of September 30, 2007, thecompany had approximately $34 million of cash there were principally repaymentson fixed loans during the quarter of approximately $63.2 million. The companyalso had approximately $326 million outstanding at the end of the quarter underits $500 million Wachovia warehouse facility.

In addition, the company has a $25 million revolving line ofcredit with KeyBanc at the end of the quarter nothing had been drawn under thisfacility.

During the quarter we originate one new investment forapproximately $35.5 million. Initial funding on that investment was $17.7million.

I'd like to now turn the call back to Evan.

Evan Denner

Thanks, Steve. We are proud of our performance in thequarter and I want to thank our investors who have stuck with us in this verydifficult market times.

With our strong manager, which is also our largestshareholder and a sound well performing portfolio, it's tough for us to watchas our stock has suffered the same fate as the sector generally but we are inthis for the long haul.

In tough times, opportunities are created and with thestrength of this platform we intend to take advantage of them for ourinvestors.

With that said, I would like to now open the call toquestions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from theline of James Shanahan with Wachovia.

James Shanahan - Wachovia Capital Markets

Good morning. Thanks for taking my call. In my communicationwith investors and you know, current or potential in the stock, really is sortof to bifurcate depending on the equity at this point that either the companyis to consider a strategy to wind down the portfolio, some other strategicchange like maybe being folded back in Hypo or alternatively, there needs to becommunication with investors or about progress being made to increase financingcapacity to grow the Quadra business.

And can you just comment strategically on, if you have givenany thought here internally to any of those strategies and if you favor oneover the other, any others at this point?

Evan Denner

We have given thought to the latter strategy and that iswe're counseling the market, looking at opportunities where we can efficientlyand effectively finance ourselves over the long haul. As we've said in pastcalls, we are not inclined to make financing decisions so quickly that couldhave long-term negative effects on the company

James Shanahan - Wachovia Capital Markets

But there hasn’t been any consideration at this point givento some other strategic change that say, running off the portfolio holding thebusiness back into Hypo, anything like that?

Evan Denner

No. There hasn't been.

James Shanahan - Wachovia Capital Markets

And what do you think the CDO market is for you as an issuerat this point? Do you think it is possible that if you get a CDO done any pointsay before mid 2008 for example?

Evan Denner

Where the market is today we don't believe that that'spossible not only for us. We think it is difficult for existing issuers.

James Shanahan - Wachovia Capital Markets

Thanks. I'll get back in queue. Thank you.

Operator

You next question comes from the line of Douglas Harter withCredit Suisse.

Douglas Harter - Credit Suisse

Thanks. Just -- if you could just clarify the fiveconstruction loans that you are selling are those condo construction loans?

Steve Sherwyn

You know, we are inthe market now selling loans or attempting to sell the loans. We obviouslyshowed some signs of success with the first closing. Because we are live in themarket we'd rather not comment on which loans they are.

Douglas Harter - Credit Suisse

I guess, could you tell us which -- $25 million loan thatyou sold. Could you give us more clarity on that one?

Steve Sherwyn

Not at this time.

Douglas Harter - Credit Suisse

Okay. And you'd mention that you are exploring some otherfinancing options. You could sort of talk about what those might be just sothat we -- so investors can get some clarity around those options?

Evan Denner

Well, I would -- talking to a number of potential financial-- number of financial institutions both with regard to traditional warehousesfacilities, as well as, extending our warehouse facility into [term]facilities.

Douglas Harter - Credit Suisse

Thank you.

Operator

Your next question comes from the line of Marsella Martinowith Keybanc Capital Markets.

Marsella Martino - Keybanc Capital Markets

Good morning. There -- I have seen in the press recentlysome commentary regarding kind of craze in Miami specifically surrounding theBiscayne area. I was wondering if you could comment on your Biscayne propertyand how that's performing?

Evan Denner

Sure. I'll even take a step further. We have twotransactions in Florida.

Marsella Martino - Keybanc Capital Markets

Right.

Evan Denner

With the total commitment of approximately $123 million withoutstanding approximately $55 million as of quarter end, 900 Biscaynespecifically is nearly sold out. It is located on Biscayne Boulevard, a fewblocks south of the new Miami Performing Arts Center and right across thestreet from the American Airlines Arena.

The buyers there, their cost basis is pretty low at anaverage of about $425 or so per square foot. We are in at around $350 persquare foot and most all buyers have 20% deposits off. The borrowers expect todeliver units in the first quarter.

The other product there is the W hotel in condominium, whichis a marquee project located in South Beach on the ocean. Sales there also arevery strong and a project is now going vertical.

Marsella Martino - Keybanc Capital Markets

Have you had any issues with walking -- depositors walkingaway from their deposits.

Evan Denner

No.

Marsella Martino - Keybanc Capital Markets

Okay. Great. Thank you.

Operator

Your next question comes from the line of David Boardmanwith Wachovia.

David Boardman - Wachovia Capital Markets

Good morning. And thank you for taking my questions. Othersin the space who had been challenging getting financing on there current lineshave looked to the leases space as a way to continue to grow the portfolio getrevenue duration. And can get non-recourse mortgage debt, is that anenvironment or is that an asset class that is interesting to you and if not,why?

Evan Denner

We spend considerable amounts of time looking at thisbusiness. We were actually analyzing a sizable transaction when we determinethat this was not a sector of the market in which we wanted to participatetoday.

Because the leases are long in term took 10 to 20 years andalso have limit contractual rent increases any upward moving cap rates willhave a significant negative impact on the value of the Quadra.

And in addition, a lot of the assets we were seeing werelocated in secondary and tertiary markets. And frankly, I just wasn'tcomfortable pulling the trigger in this market.

David Boardman - Wachovia Capital Markets

We've seen a couple of others in the space also take therefacilities through line wonders maybe look to pay them down a bit and then do aterm facility through -- and get maybe three years of term at a higher cost offund. It seem like you are highlighting that you might be pursuing somethinglike that as well.

Just one of you could frame up the trade between higher costof funds in getting extended term and how likely you are to do that?

Evan Denner

Its something that we are exploring very strongly at thispoint, I mean with indefinite or difficult determinations made when the CDOmarket will return to get the flexibility and the liquidity that a term linewill provide. We think the offsetting increase in cost of funds will be wellworthy.

David Boardman - Wachovia Capital Markets

I remember earlier during the due diligence you hadcommented that spread widening really never occurred on the construction side.You know, in the new environment here is it fair to say that maybe yourcontinued exposure in that market you will not get the pick up that other peersmight through the spread widening and other assets classes?

Evan Denner

Well, I think what we said prior was that the constructionspace has not suffered from the same spread compression that we saw in othersectors rights and even in the whole loan sector, B Notes, mezz we saw asignificant spread compression over the past 18 to 24 months and we did not seethat in the construction space.

Commercially, we have seen over the last 90 days somemovement in that space where spreads have widened, perhaps not a significantlyin some of the other finance type vehicles.

But we've seen spreads of 20 or spread increases of 25 to 50basis points in that space. And that’s to Tier One Developers. I imagine thatwhen you get down below that level the spread movement is even greater.

David Boardman - Wachovia Capital Markets

Evan, just one last question I appreciate all the time youhave given me. I was just wondering if you could comment on the health of Hypoas a larger entity and just how that maybe affects Quadra?

Evan Denner

Well, Hypo is our manger other than that there is really notmuch to comment on. Its okay, it’s a probably trading company, temporarychanged with that, 30 largest companies in Germany, you know, more than that Ican't answer.

David Boardman - Wachovia Capital Markets

Okay. Thank you.

Operator

Your next question comes from the line of James Shanahanwith Wachovia.

James Shanahan - Wachovia Capital Markets

Thanks for taking my questions. The most part have beenasked and answered, I did have a follow-up though just to clarifying point. Isit true that Biscane is the project in the portfolio for which we should expectthe earliest deliveries or other projects where you are actually seeking morein terms of the condo project? We were actually delivering, excuse me,delivering units to owners or participants at this point?

Evan Denner

We have number of products in that, we expect delivery tooccur later this year into first quarter and that would include a Riverside andour 200 West End Project, as well as, 900 Biscayne and Trump International.

James Shanahan - Wachovia Capital Markets

Thank you.

Operator

(Operator Instruction) Your next question comes from theline of Douglas Harter with Credit Suisse.

Douglas Harter - Credit Suisse

I remember last call we were talking about the fact thatyour warehouse line had an option to expand by $250 million do you still feellike that would is available to you?

Steve Sherwyn

Right now that’s not a conversation that we think to moveforward very quickly and we wouldn’t in regular dialogue obviously withWachovia and they continue to be a great partner but as far as increasing the linerate now. It's not something we're strongly pursuing.

Douglas Harter - Credit Suisse

Thanks.

Operator

Your next question comes from the line of David Boardmanwith Wachovia.

David Boardman - Wachovia Capital Markets

Thank you very much. I was just wondering if you couldcomments on the Phoenix, Arizona land loan kind of what's the business strategywith that loan? When it was originated and if you could just provide some coloron that like you have on some of the other assets?

Evan Denner

Sure. It’s a project that is fully entitled located inPhoenix. Its -- right now they're going through a highest and best usedanalysis to determine whether or not resi, hotel, office etcetera provides thegreatest economic returns. Again, well-located, pretty low basis compared towhat's going on in the market and loan that we would make again today, strongsponsorship and again a loan review today.

David Boardman - Wachovia Capital Markets

Is it a sponsor that you have worked with before?

Evan Denner

It is a sponsor that we have looked at many opportunitieswith in the past. They're extremely well financed and when that we continue tolook at opportunities with today.

David Boardman - Wachovia Capital Markets

Okay. Thank you very much for your time.

Operator

(Operator Instructions) At this time, there are no furtherquestions.

Evan Denner

Thank you again everybody for being with us this morning andwe look forward to seeing you and speaking with you in the near-term. Thanks.

Operator

Thank you. This does conclude today's Quadra Realty Trustthird quarter earnings call. You may now disconnect.

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