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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

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

Operator

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

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

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

Evan Smith

Thank you. Good morning everyone and welcome to the third quarter 2007 earnings call for Quadra Realty Trust. On the call from management today is Evan Denner, President and CEO, and Steven Sherwyn, Chief Financial Officer.

Before we begin, I would like to inform everyone that certain statements in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the company's business prospects and anticipated investment performance.

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

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

For discussion of some of the risks and important factors that could effect the company's future results, see a section called Risk Factors in the company's prospectus dated February 14, 2007, which is available on the company's website at www.quadrarealty.com.

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

The company expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company's expectations with regard thereto any change in events, conditions or circumstances on which any statement is based.

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

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

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

Evan Denner

Thanks, Evan. Good morning, everyone and thank you for being on 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 the volatility in the credit markets continues to present challenges to all market participants and we are no exception.

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

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

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

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

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

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

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

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

The strength of our underwriting is reflected in our portfolio. As of September 30, 2007, we held investments and loans of approximately $654 million net of un-amortize upfront fees, premiums, discounts and 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 million consisting of 35% condominium construction, 16% residential, 16% retail, 11% land, 7% hotel, 7% office, 5% other and 3% mixed use. With 75% first mortgage loans and 25% in mezzanine loans. This includes outstanding balances and commitments related to loans available for sale.

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

In terms of geographic exposure at the end of the quarter we had 45% exposure in New York, followed by Florida at 14%, Nevada 11%, Maryland at 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 of condominium construction loans in our portfolio. We believe that each project for 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 real estate sector remain positive albeit with some volatility due to the near-term disruption in the credit markets.

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

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

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

This continues to cause significant disruption in the CDO market and the CMBS market and has lead to concerns that mortgage REITs may face increasing margin cost and/or diminish availability under their warehouse lines.

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

We have likewise taken a very cautious position in deploying capital over the past few months and we anticipate that this will continue through the end of the year. The market is resetting itself on almost a daily basis.

We believe that this period of disruption may present attractive opportunities for us in a future and as the market adjusts in awake of the current disruption we will judiciously deploy resources and capital in order to be able to take advantage of these attractive opportunities as they arise.

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

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

In addition unfunded loan commitment associated with these five loans were approximately $154.3 million, the sales were reduce our outstanding commitments providing us with additional flexibility.

I am please to report that subsequent to the end of the quarter, we sold a $125 million commitment in one of the five loans at a nominal 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 the strength of our portfolio, we understand the need to diversify our portfolio by asset type, asset class and geography. And create the necessary liquidity and flexibility to take advantage of market opportunities as they may arise.

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

Steve Sherwyn

Thank you, Evan. Good morning. As Evan stated, our third quarter results reflect the strength of our business, which enables us to deliver strong net income and enhance returns to our shareholders. Now, let me walk you through our financial results for the third quarter ended September 30, 2007.

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

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

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

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

Funds from operations or FFO for the quarter were also $6.7 million or $0.26 per share. AFFO for the quarter was approximately $6.8 million or $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 the prior year.

Moving to our liquidity as of September 30, 2007, the company had approximately $34 million of cash there were principally repayments on fixed loans during the quarter of approximately $63.2 million. The company also had approximately $326 million outstanding at the end of the quarter under its $500 million Wachovia warehouse facility.

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

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

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

Evan Denner

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

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

In tough times, opportunities are created and with the strength of this platform we intend to take advantage of them for our investors.

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

Question-and-Answer Session

Operator

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

James Shanahan - Wachovia Capital Markets

Good morning. Thanks for taking my call. In my communication with investors and you know, current or potential in the stock, really is sort of to bifurcate depending on the equity at this point that either the company is to consider a strategy to wind down the portfolio, some other strategic change like maybe being folded back in Hypo or alternatively, there needs to be communication with investors or about progress being made to increase financing capacity to grow the Quadra business.

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

Evan Denner

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

James Shanahan - Wachovia Capital Markets

But there hasn’t been any consideration at this point given to some other strategic change that say, running off the portfolio holding the business 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 issuer at this point? Do you think it is possible that if you get a CDO done any point say before mid 2008 for example?

Evan Denner

Where the market is today we don't believe that that's possible 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 with Credit Suisse.

Douglas Harter - Credit Suisse

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

Steve Sherwyn

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

Douglas Harter - Credit Suisse

I guess, could you tell us which -- $25 million loan that you 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 other financing options. You could sort of talk about what those might be just so that 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 warehouses facilities, 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 Martino with Keybanc Capital Markets.

Marsella Martino - Keybanc Capital Markets

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

Evan Denner

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

Marsella Martino - Keybanc Capital Markets

Right.

Evan Denner

With the total commitment of approximately $123 million with outstanding approximately $55 million as of quarter end, 900 Biscayne specifically is nearly sold out. It is located on Biscayne Boulevard, a few blocks south of the new Miami Performing Arts Center and right across the street from the American Airlines Arena.

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

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

Marsella Martino - Keybanc Capital Markets

Have you had any issues with walking -- depositors walking away 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 Boardman with Wachovia.

David Boardman - Wachovia Capital Markets

Good morning. And thank you for taking my questions. Others in the space who had been challenging getting financing on there current lines have looked to the leases space as a way to continue to grow the portfolio get revenue duration. And can get non-recourse mortgage debt, is that an environment 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 this business. We were actually analyzing a sizable transaction when we determine that this was not a sector of the market in which we wanted to participate today.

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

And in addition, a lot of the assets we were seeing were located in secondary and tertiary markets. And frankly, I just wasn't comfortable pulling the trigger in this market.

David Boardman - Wachovia Capital Markets

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

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

Evan Denner

Its something that we are exploring very strongly at this point, I mean with indefinite or difficult determinations made when the CDO market will return to get the flexibility and the liquidity that a term line will provide. We think the offsetting increase in cost of funds will be well worthy.

David Boardman - Wachovia Capital Markets

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

Evan Denner

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

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

But we've seen spreads of 20 or spread increases of 25 to 50 basis points in that space. And that’s to Tier One Developers. I imagine that when 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 you have given me. I was just wondering if you could comment on the health of Hypo as a larger entity and just how that maybe affects Quadra?

Evan Denner

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

David Boardman - Wachovia Capital Markets

Okay. Thank you.

Operator

Your next question comes from the line of James Shanahan with Wachovia.

James Shanahan - Wachovia Capital Markets

Thanks for taking my questions. The most part have been asked and answered, I did have a follow-up though just to clarifying point. Is it true that Biscane is the project in the portfolio for which we should expect the earliest deliveries or other projects where you are actually seeking more in 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 to occur later this year into first quarter and that would include a Riverside and our 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 the line of Douglas Harter with Credit Suisse.

Douglas Harter - Credit Suisse

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

Steve Sherwyn

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

Douglas Harter - Credit Suisse

Thanks.

Operator

Your next question comes from the line of David Boardman with Wachovia.

David Boardman - Wachovia Capital Markets

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

Evan Denner

Sure. It’s a project that is fully entitled located in Phoenix. Its -- right now they're going through a highest and best used analysis to determine whether or not resi, hotel, office etcetera provides the greatest economic returns. Again, well-located, pretty low basis compared to what's going on in the market and loan that we would make again today, strong sponsorship 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 opportunities with in the past. They're extremely well financed and when that we continue to look 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 further questions.

Evan Denner

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

Operator

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

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Source: Quadra Realty Trust, Incorporated Q3 2007 Earnings Call Transcript
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