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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
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On February 27, 2003, Charter Municipal Mortgage Acceptance Company (the
"Company") hosted a conference call to discuss the Company's fourth quarter and
year-end earnings. The following is the transcript of that call.
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
Page 1
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
February 27, 2003
10:00 a.m. CT
Operator: Good day, and welcome to the Charter Municipal Mortgage Acceptance
company's fourth quarter and year end earnings release conference call.
Today's call is being recorded.
The company's press release was issued this morning. We would like to
remind you that certain statements in this press release may constitute
forward-looking statements within the meaning of the Safe Harbor
Provisions of Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and beliefs
and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements.
Such forward-looking statements speak only as of this date of this press
release. CharterMac expressly disclaims any obligation or undertaking to
release publicly any updates or revisions or any forward-looking
statements contained herein to reflect change in CharterMac's
expectations with regard there to or change in events, conditions or
circumstances on which any such statement is based.
CharterMac will be filing with the SEC. And after its review, mailing to
shareholders a proxy statement in connection with the proposed
transaction described in the press release under the heading acquisition
of related capital company. Investors and security holders are urged to
read
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
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the proxy statement because it will contain important information. The
proxy statement and other documents followed by CharterMac with the SEC
may be obtained when they become available free of charge at the SEC's
Web site, www.sec.gov. Or from CharterMac by contacting the shareholder
services department directly at 1-800-831-4826.
With respect to the proposed transaction described in the press release
under the heading acquisition of Related Capital Company, you should
review the risk factors contained in CharterMac's public filings. And in
the proxy materials that will be filed and distributed to shareholder's
in connection with the approval of the proposed acquisition for
discussion of the risks related to the proposed acquisition and
ownership of CharterMac's common shares.
CharterMac and it's trustees and officers and Related Capital Company
and its principals and officers may be deemed to be participants in the
solicitation of proxies from CharterMac shareholder's in connection with
acquisition. These potential participants have interest in the
acquisition some of which could differ from those of CharterMac
shareholder's generally. Information about the executive trustees and
officers of CharterMac and related capital company including such
individuals ownership of CharterMac is contained in CharterMac's Form
10-K for the year ended December 31st, 2001. And in the proxy statement
for CharterMac's 2002 annual meetings of shareholders, each of which is
available at the SEC Web site listed above.
Investors and security holders may obtain additional information
regarding the interest of such potential participants by reading the
proxy statement when it becomes available. With us today from the
company are Mr. Stuart Boesky, President and Chief Executive Officer and
Stuart Rothstein, Chief Financial Officer.
At this time, I would like to turn conference over to Mr. Stuart Boesky.
Please go ahead, sir.
Stuart Boesky: Thank you very much, Amy. I think you're speaking part was
larger than mine today.
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
Page 3
I'd like to thank everyone for joining us today. And thank you for your
continued interest in CharterMac. We're pleased, again, to be able to
report to you another year of successful operations and meaningful CAD
growth.
The format of the call will be as follows. I'll give you a general
overview of CharterMac's '02 activity. Then, I'll comment on the overall
performance of our bond portfolio during 2002, general market conditions
and our expectations for '03. Then Stuart Rothstein will review our
financial performance and give financial guidance for '03. After Stuart
finishes, we'll open the call up to questions.
The year 2002 was clearly an extraordinary year for CharterMac. During
the year, we made significant progress towards establishing the company
as a dominant multi family finance company in the U.S. During the year,
we celebrated our fifth anniversary as a public company by providing
over $1.2 billion worth of financing for multi family housing. This
compares to just $83 million our first year of operations in 1998. We
also continue to diversify our revenue sources by participating in our
first transaction to guarantee low income housing tax credit benefits.
At the same time, we successfully completed the integration of our first
business acquisition, PW Funding. And during the year, our loan
servicing portfolio grew to $4.7 billion as compared to just $330
million at the start of our operations in 1998. We accomplished
virtually all of the material goals that we set out for in our business
plan for 2002. As a result, cash available for distribution per share
for the year ended December 31st, 2002, grew by 9.6 percent. This
compares to our average annual growth rate since inception of 8.8
percent.
Finally, we ended the year with the announcement of our proposal to
acquire Related Capital Company. This acquisition will internalize our
management and create one of the nation's largest
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
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fully integrate multi family finance company with over $18 billion worth
of assets over management.
Now I'm going to focus a bit on investment activity. Our portfolio bond
investment activity reached a record level during 2002. CharterMac
originated and acquired bonds totaling over $500 million secured by over
9,500 units of multi family housing. This represents a 70 percent
increase over '01 numbers. During the fourth quarter, historically our
most active quarter, we acquired 23 tax exempt bonds and three taxable
revenue bonds and provided three forward commitments totaling $224
million.
The bonds that we originated and acquired in 2002 had a weighted average
interest rate of 6.78 percent, a weighted average maturity of 36 years,
and a weighted average pre payment lock out of 14 years.
While our weighted average interest rates in 2002 were 62 basis points
lower than '01, the spread between our borrowing costs and our
origination rates actually increased by 54 basis points. Our average
cost of debt for '02 was approximately 2.4 percent before effecting that
for hedging as compared to 3.56 percent during '01.
We continue to see high quality investment opportunities in the
affordable multi family market, while market rate multi family
development and unit absorption slowed. Notwithstanding conditions in
several affordable sub markets, most notably Atlanta and Austin have
softened significantly. As a result, we passed on more transactions last
year than in any year in our history. At the same time, we entered in to
new markets with more favorable demand characteristics such as
Mississippi, Nebraska and Ohio. In addition, we developed many new
relationships with larger and more experienced developers. Approximately
half of our transactions were closed with developers that we've done
business with for the first time.
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
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The steep yield curve has become a problem for developers of affordable
housing since equity investors enter transactions during construction
but will not tolerate interest rate risk. Therefore, developers, are
forced to use long term fixed rate financing to build their properties.
This is in contrast to market rate developers who typically use LIBOR
based floating rate debt during construction and lease up and then fix
their rates at stabilization.
Historically, bond financing in particular has allowed developers to
benefit from positive arbitrage between tax flow and tax exempt rates
during construction. Today one of the most serious issues for developers
is negative arbitrage between short term rates earned on invested bond
proceeds during construction and long term fixed rates they pay on their
bonds.
Keeping with our tradition and our tag line of providing developers with
effective capital solutions, we brought to market a product last year,
that helped us reduced negative arbitrage. This product has made a much
more competitor lender.
In addition, we've developed a product with our subsidiary PW Funding
that combines in a single execution low cost financing offered by Fannie
Mae with higher cost financing available to our portfolio investing
activity. The end result is more loan proceeds to developers than an
agency execution, but lower rates that are available through typical
direct purchase programs.
This structure enables us to become more competitive in important
markets like California where we've recently lost market share. These
two innovations are examples of how we're using our growing platforms to
be more competitive. And at the same time, increasing our return on
equity. We'll continue to expand to use these products together with
other new products to gain market share and expand our margins.
I'd like to shift our focus now to PW Funding. PW Funding is our
subsidiary that originates in services loans on behalf of third parties,
such as Fannie Mae, Freddie Mac and FHA. We're
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
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pleased to report that PW Funding originated $698 million worth of loans
in 2002. Although this is an 11 percent decrease from investment
activity during '01, industry wide, agency lends decreased their lending
volume by 21 percent. In addition when you - when we acquire PW Funding
at the end of 2001 we assumed volumes of only $563 million. Therefore,
we actually exceeded our original acquisition assumptions by 24 percent.
It's also very important to note that 81 percent of PW's '02 business
consisted of new loans rather than portfolio refinancing. Therefore, we
were able to add $564 million of new servicing to the portfolio. And we
ended the year with $3.2 billion of total servicing. In fact, PW added
more new loans to its servicing portfolio in '02 than it has in any year
of its history. The servicing increase represents approximately $9
million worth of unrealized capital appreciation for Charter.
The synergies that have been realized between CharterMac, Related
Capital and PWF are quite noteworthy. PWF originated $155 million worth
of loans secured by affordable multi family last year. A 240 percent
increase over their affordable loan production during '01.
With respect to Fannie Mae affordable originations, alone, PW jumped
from number 13 in the nation to number five in the nation.
With respect to the tax credit guarantee transaction, in July 2002
CharterMac participated in a transaction to guarantee tax benefits on a
low income housing tax credit investment. This transaction, which was
immediately accretive to CAD, was another example of our push to
diversify CharterMac's revenue sources and expand it's operating
margins. We're extremely pleased with the risk/reward profile of this
transaction. We'll receive a very attractive guarantee fee for taking
risk that's implicit in our portfolio lending business.
The risk underwriting and risk management associated with this business
falls squarely within our core competency. At the same time, we estimate
the returns will be 50 percent higher than our
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
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core performance. Property performance is the principal of risk
associated with this new line of business. And it's important to note
that since 1987, low income housing tax credit transactions have had
less than two-tenths of one percent incident of foreclosure.
In summary, we hope to continue this business in higher volumes
throughout '03.
And now I'd like to give you a short overview of the performance of our
bond portfolio during '02. We're pleased to report that the stabilized
properties underlying our bonds, those properties not in lease up or
under construction posted positive same store NOI growth of 1.74
percent. This compares favorably to the multi family housing market as a
whole, which posted negative NOI growth of 4.1 percent last year.
As of December 31st, 2002, CharterMac had direct and indirect ownership
interest in 210 bonds with a carrying value of approximately $1.6
billion secured by 32,500 multi family units in 25 states and the
District of Columbia.
Our tax exempt revenue bonds have a weighted average interest rate of 17
- excuse me of 7.1 percent, a weighted average maturity of 33 years, and
a weighted average pre payment locked out of 12 years.
Forty percent CharterMac's bond portfolio was comprised of stabilized
bonds as of December 31st, 02. Weighted average debt service coverage of
the stabilized portfolio at year end was 1.29 percent. Same store debt
service coverage at year end of existing stabilized bonds was 1.3
percent as compared to 1.22 percent at the same time last year. Average
occupancy for the entire stabilized portfolio at year end stood at 92.5
percent as compared to 94.2 percent at the end of the previous year.
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
Page 8
While our occupancies have declined, same story NOI and debt service
coverage has increased. I'm extremely happy, also, to be able to report
that interest payments are current on all of our bonds, and there are no
material construction issues at properties that are under construction.
With respect to the acquisition of Related Capital Company as I
mentioned earlier, we're pleased to announce in December that CharterMac
entered in to an agreement to acquire 100 percent of the ownership
interest of Related Capital Company and substantially all of the
businesses operated by Related Capital Company.
In addition to acquiring the company, the transaction will result in the
internationalization of management at CharterMac. The transaction is
subject to shareholder vote. And we plan to make our initial proxy
filing with the SEC no later than next week. Looking forward to '03. We
believe we're in a very good position to maintain or exceed historic
levels of growth. Our '03 business plan assumes the national economy
with flat or slow growth. We're assuming that the yield curve will
remain steep. We're also confident that the affordable multi family
industry will continue to out perform multi family housing and the
economy in general.
Absent a severe downturn in the economy or a spike in interest rates,
the economic environment for CharterMac this year should be favorable.
While multi family housing starts fell 7.6 percent in January, it
followed a big jump in December and a 4.6 percent increase for the year
end 2002.
We estimate that affordable multi family housing starts were up 15
percent for the year ended December 31st, '02. And that at least 50
percent of all multi family housing starts last year had some component
of affordable housing. Therefore, all of the growth in housing starts
changing from the affordable sector in our estimation. We expect
affordable multi family housing starts will increase just slightly
during '03. We plan to acquire between $400 and $500 million of new tax
exempt bonds during '03. And PW Funding is expecting to originate $700
to $800 million of new loans on behalf of Fannie, Freddie and FHA.
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
Page 9
In total our portfolio and agency lending business should range
somewhere between $1.1 and $1.3 billion. We also expect to close between
one to two additional guaranteed tax credit transactions. At the same
time, we will continue to work on new products. And we'll diversify our
revenue sources, and increase our return on equity and lower our cost of
funding.
Before I turn the call over to our CFO, I'd like to announce that during
the fourth quarter, Mike Forney, the President of PW Funding retired and
will be relocating to his home in Steamboat Springs, Colorado. On behalf
of PW Funding I'd like thank Mike for his many years of superior
service. On behalf of CharterMac, I'd like to thank Mike for helping us
through our 12 month transition period. Mike is a consummate
professional and will remain a leader within the mortgage banking
industry in its various advisory roles.
I'd also like to congratulate Bill Hyman and Kelly Schnur long time
leaders at PW. Jointly, they'll be assuming Mike's role in a newly
formed Office of the President. At this point, I'll turn the call over
to Stuart Rothstein. Stuart.
Stuart Rothstein: Thanks, Stuart. For those of you that have the supplemental
package, I will just highlight a few things on the financial highlight
page of the package, and then move forward to a discussion of 2003
guidance. As Stuart mentioned earlier for the year, our year-over-year
CAD per share growth was 9.6 percent. And equally significantly, we
increased dividends year-over-year on an annual basis, 10-and-a-half
percent. While at the same time keeping our pay out ratio at just under
85 percent for the full year, which is consistent with the guidance
we've given on previous calls in terms of keeping pay out ratio around
85 percent.
Also in looking at the capitalization of the company at the end of the
year, you'll notice that on a debt to total assets basis we were about
40 percent levered at the end of the year. We
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
Page 10
mentioned on our last call that over time, we'd like to get that closer
to 45 percent and run the company in that leverage range. And we are
making progress towards making that happen.
Turning to a discussion of 2003 guidance, reiterating what Stuart said
in terms of our base business volumes for '03, we would expect
CharterMac to originate in the neighborhood of four to $500 million
worth of revenue bonds for '03. And we would expect $700 - $800 million
worth of origination for PW Funding.
We would also expect to in one or two transactions replicate the credit
enhancement on the guaranteed business that we were able to do in 2002.
The other major event impacting our 2003 numbers will be what we hope to
be the successful acquisition of RCC's businesses, which for purpose of
our model for '03, we're assuming the transaction will close sometime in
Q3 of this year. Obviously, that timing is subject to change. And we
will update as necessary if the timing appears to be changing.
Looking at numbers for a combined CharterMac and RCC. On a full year
basis, we would expect the combined company to earn on a CAD per share
basis about 10 percent in excess of what CharterMac earned in '02. That
would be about $1.65 is what we would expect the combined companies to
earn on a sustainable run rate basis.
However, given the way RCC's business works and the seasonality inherent
in RCC's business, there's potential that the combined company will
immediately exceed the $1.65 for this year. Given the fact that as RCC's
business works, they - a lot of their expenses are incurred in the first
part of the year. And a lot of the revenue and profit tied to those
expenses are realized in the latter part of the year. And given the way
the deal is structured and the timing of the deal as it looks right now,
CharterMac would receive, at least for this year, the benefit of that
seasonality in RCC's business.
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
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As it pertains to the base business for CharterMac, we would expect the
first half of the year to be similar to last year in terms of CAD per
share levels with moderate increases. And then we would expect to
realize most of the growth in our CAD per share during the latter part
of the year.
On a going forward basis, I think we will experience greater fluctuation
in our quarterly numbers as more of our revenue in CAD will be generated
from the fee businesses we will be acquiring from RCC. As well as our
shift towards more of our CAD coming from the fees associated with
credit guarantee transactions. From a CAD perspective, it is somewhat
lumpy. And it also difficult to predict when exactly that income will be
realized.
With that, I will turn it over to the operator for questions.
Operator: Thank you. The question-and-answer will be conducted electronically.
If you would like to ask a question, please do so by pressing the star
key followed by the digit one on your touch-tone phone. If you are using
a speakerphone, please make sure your mute function is turned off to
allow your signal to reach our equipment. We will proceed in the order
that you signal us and take as many questions as time permits. Once
again, press star one on your touch-tone to ask a question.
We'll pause for just a moment to give everyone an opportunity to signal
for questions.
Our first question comes from Jay Leupp with RBC Capital.
Jay Leupp: Good morning, everyone. I'm here with David Copp. Just a couple
of questions Stuart following up on your new markets comments. Could you
talk a little bit about any increased competition that you're seeing
either in the tax exempt side or on the taxable side as you growth
business nationwide?
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
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Stuart Boesky: Yes, actually, there's a fairly significant shift in the nature
of our competition. Historically, the affordable industry has been
populated with smaller players who focus their activity exclusively on
affordable housing. And what we've seen happen is there's a - there's
finally begun to be this rotation in that kind of scenario so that we're
seeing much larger financial institutions that are playing in this
market, primarily through acquisitions of smaller entities.
For instance, GMAC has become a major player in the affordable sector of
the market, just over the last 18 months by virtue of two strategic
acquisitions, and several new hirings. I would say that, you know, if I
had to point to one company that was probably the most aggressive in our
industry as far as lending an underwriting practices, and also pricing,
it would be GMAC.
To take that theme a little bit further, Wachovia bank, CS First Boston
and (Key Bank) became participants in the ownership of Fannie Mae and
Freddie Mac licensed lenders. So the banks are more involved in our
business. Larger financial institutions are dedicating more resources to
our business. And we expect that to continue throughout 2003. We think
there's going to be more consolidation. There are rumors of at least two
or three other similar transactions to the ones I've described. So if I
had to summarize it's becoming a business populated by larger
institutions.
As far as the effect on us, I think that on the one side, it's clear
that the new players or the new entries in to our market, have the kinds
of financial resources that we've been able to bring to bear in the
marketplace, so they're tougher competitors. However, over a longer
period of time, what we found is that larger organizations have a much
more difficult time cross selling products because of, you know, the
amount of management and the different subsidiaries involved in the
process.
What we've also found is that having an organization with the kind of
resources we have that are specifically focused on this business so that
we're not a subsidiary of a company that does many
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
Confirmation # 613323
Page 13
more things, allows us to be much more focused. And allows us to react
faster to changes in the marketplace.
And also, as I'm sure you know, for large institutions businesses become
short term in nature. And what is a fad right now may become something
they're not interested in, in two or three years. And luckily, most of
our developers understand that. Most of our clientele understands that.
And therefore, we don't expect to see a large amount of our good
customers, jumping ship because they don't want to be without a
relationship when some of the big institutions get out of the business.
Long-story short, it's obviously something we're focused on. We have
competition now that has resources that we have but I'm not sure they'll
continue to have the focus we have.
Jay Leupp: OK. And then on the comments that you made about your change in
cost of funds over the last year, could you also expand a little bit on
the change in hedging cost that you've seen in the last year? And just
one follow up on your property level coverage comments, did you say that
your property level coverages had increased from 1.22 times to 1.3 over
the past year?
Stuart Rothstein: Same store, yes.
OK. In terms of hedging, we actually didn't do any hedging of BMA during
the year. We still have in place two hedges totaling $150 million in
place. And we did put in one interest rate cap during the first quarter
related to the funding for the acquisition of PW Funding.
In terms - broadly speaking, in terms of hedging costs obviously, as
rates have continued to go down and stay at these levels, short term
swaps and caps have become somewhat cheaper, but there's still a
significant premium paid for getting any type of term associated with
interest rate protection.
CHARTER MUNICIPAL MORTGAGE
Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
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OK. Last question, just the comments, Stuart that you made earlier about
this new product that you've introduced that eliminate the near term
negative arbitrage for your clients, do you view this product as
something that's potentially proprietary and something that you can
actually see some revenue growth from over time?
Stuart Boesky: We certainly will see some increase in our return on equity by
using this for various reasons. I don't want to go in to too much detail
because I think it is somewhat proprietary. So yes, I think we get a
better turn on equity, so our margins will be increased.
This year, we are budgeting to do 150 to maybe a maximum of $200 million
worth of this business. So that it could represent a substantial portion
of our total portfolio investing. So yes, we should see some benefit of
that. But I think probably the more important long-term benefit is that
by having a more competitive product than our competition, we'll be able
to get better deals long-term. And we'll be able to deal with better
developers. So I'm more excited about that in the short term pick up in
return on equity.
Jay Leupp: Thank you.
Stuart Boesky: Yes.
Operator: Moving to Don Fandetti with Wachovia Securities.
Don Fandetti: Two quick questions, can you provide us an update on your
80-20 assets, specially the debt service coverage? And can you comment
if that helped - if those assets, that performance this quarter helped
your same store numbers?
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Moderator: Stuart Boesky
02-27-03/10:00 a.m. CT
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Stuart Boesky: Yes, I think that - although I don't have it broken out right
here, a fairly large portion of our product is 80-20 product. So I think
it's safe to say that, you know, when our same store NOI has increased,
and our debt service coverage is increased, that it's fair to say that
our 80-20s probably track that somewhat.
I would probably say that they were less positive in total than our 100
percent affordable stabilized properties. But nonetheless, they're
holding up very well. If you'd like, if you want to call up and talk to
Stuart or Hilary Forman we can get your more specific breakdowns after
the call.
Don Fandetti: OK. And lastly, in terms of the underlying multi family
assets, it looks like there was an occupancy decline in the quarter. Can
you just give us an idea of where those folks are going?
Stuart Boesky: John, do you have some insights on that? John Sorel?
John Sorel: Well I actually have the data on - the raw data right in front of
me and I've been looking at it. I think there are a couple of things. We
track physical occupancy and it's an average. And there are clearly some
weaker sisters in the sub set that have dragged that average down maybe
out of proportion to their importance.
And the other dynamic that is in play is that a number of the sizeable
properties in the pool had very significant improvement in NOI. And I'll
give you an example Ocean Air which is a very sizeable 100 percent
affordable deal in Virginia. That transaction went from 1,122,000, in
NOI in '01 to 1,468,000 in NOI in '02 while growing its occupancy only
from 96 percent to 97 percent. And that's a project, that for instance,
we know has a large clientele, a large tenant base holding section eight
certificates which tends to improve net rent. This is about the third
year it's been stabilized now. They're definitely improving their
expense side of their transaction.
CHARTER MUNICIPAL MORTGAGE
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02-27-03/10:00 a.m. CT
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I think there's a number of examples of that where NOI has improved
dramatically out of proportion to actual improvement of physical
occupancy.
Stuart Boesky: As far as - and maybe getting to your point, where do the people
who move out of these units go to, I think that unlike the market rate
housing where people are leaving to take advantage of being a first time
home owner because interest rates are so low, that doesn't tend to be
the case in our properties. In our properties is the more likely
scenario is that tenants, you know, they start to double up or, you
know, to the extent that occupancy is an economic occupancy number, you
know, where it may have gone down to percent, they may still be there.
It's just getting more and more difficult to collect the rent from them.
So, you know, what I would say is that certainly they're not following
some of the trend of the market rate apartment community, which is
they're not buying homes in general.
Don Fandetti: OK. So the number you report in your supplemental is that an
economic or physical occupancy.
Stuart Rothstein: This is a physical occupancy.
Stuart Boesky: The - what's reported I guess in our supplemental is physical.
Stuart Rothstein: OK. Thanks.
Operator: Moving on to Rod Petrik with Legg Mason.
Rod Petrik: Good morning, Stuart. Hi, Stuart.
Stuart Boesky: How are you doing?
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Rod Petrik: The 400 and $500 million of acquisitions that you're projecting
for this year, any breakdown on how much of that is refinancing and how
much are new issue bonds?
Stuart Boesky: On the four to 500 which is portfolio investing ...
Rod Petrik: Right.
Stuart Boesky: The lion share of that business, call it 90 percent will be new
construction.
Rod Petrik: Last call I think you estimated that there's about 120,000 new
units being completed on an annual basis in the affordable housing
program.
Stuart Boesky: Give or take, yes.
Rod Petrik: How much - what's the breakdown of funding as far as tax exempt and
conventional mortgages now?
Stuart Boesky: It's about 30 percent tax exempt give or take. You know, I could
be off by five percent on the up side or the down side?
Rod Petrik: So how big is that when - what's the average loan size there?
Stuart Boesky: Our average loan size on the tax exempt side is about call it $9
million. The average loan size on the taxable for 100 percent affordable
is probably three to four million, it's about half.
Rod Petrik: Yes, but how big is that tax exempt bond market on an annual
basis? I mean how many new bonds are being - I mean what's your market
share looking like. You know, if you're going to do...
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Stuart Boesky: That's right, at 500 million, we're probably about 10 percent.
So we're talking about, you know, $5 billion total in debt, give or
take.
Rod Petrik: OK. On the seven to $800 million that you look for PWF to
originate ...
Stuart Boesky: Right.
Rod Petrik: What's the revenue that you just generated from that in estimate?
Stuart Boesky: Well they're generating revenues of on average about 90 basis
points to 100 basis points on the up front transaction. That's in the
form of origination fees and/or trading profits. They hold the loan for
a couple of days before they sell it. And they have the option to either
sell it directly to Fannie or Freddie. Or they can sell it to a Wall
Street firm. And generally they pick up some profit.
So let's call it 100 basis points or one point up front.
Rod Petrik: And what kind of margins are they running at?
Stuart Boesky: The reality is that the margins on that business are very, very
small. So, for instance, Stuart what are we expecting? Give a range of
CAD off of PW's seven to $800 million.
Stuart Boesky: I would say that the margins might be 20 basis points maximum.
But in addition, and the more important part of that business that I
tried to emphasize when I talked about PW is the servicing portfolio.
And what's really exciting about the new combination of PW CharterMac is
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that our business is very heavily weighted towards generating new loans.
And that's much different than the typical agency lender.
They're consistently refinancing, you know, their old loans. So they're
basically sort of churning their own portfolio. The fact that 81 percent
of PW's business last year was adding new servicing is very significant.
Servicing is very valuable at this point. And, you know, just to
reiterate, they added about 500 or so million of new loans last year,
and it represented roughly $9 million worth of capitalized value for
that company.
Fannie pays anywhere from 30 to 40 basis points of servicing. Freddie
probably averages about 12 to 17 basis points. You lock that in for 10
years. And more importantly both Fannie and Freddie make it very
attractive to refinance with them. So once you get a Fannie or Freddie
loan in your portfolio, it's very unlikely that you're ever going to
lose it. And that's why it's such valuable servicing to buyers.
So anyway, to make a long story short, the PW business for us is a
building capital value business. And it's adding to - in a synergistic
way to our ability to sell all of our products that generate more up
front revenues. But nonetheless, you know, it pays for itself to add the
servicing and then some. So, you know, we'll get - you know, last year,
I think we had four to five million of CAD generated by PW. And, you
know, I wouldn't think it should be less than that, and it probably will
be slightly more than that.
Stuart Rothstein: It was actually in the mid threes in CAD
Stuart Boesky: Significant upside.
Stuart Rothstein: You know approaching four if not north, we expect for '03.
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Rod Petrik: All right, thanks.
Stuart Boesky: You're welcome.
Operator: As a reminder, if you would like to ask a question, please press star
one.
We'll now hear from Tony Howard with Hilliard Lyons.
Tony Howard: Good morning, congratulations on a good quarter, good year.
Stuart Boesky: Thank you, Tony.
Tony Howard: A clarification on your last comments, actually Stuart as far as
on the PW Funding, the 700 - 800 million for 2003 and originations. And
last year was 81 percent, I think, was in to the servicing. How much did
you expect in 2003 to stay in servicing?
Stuart Boesky: Well we expect virtually all of the growth to the extent that we
can accomplish this in a pretty down market for the agency lenders to be
in new loans. So I would expect that at least 80 percent of what we can
originate this year at PW will be new loans, once again.
Again, we're driving, when I say we, CharterMac is driving a lot of new
business to PW that they wouldn't otherwise see. Yes, again, I think 80
percent is a reasonable number to use for new loans.
Tony Howard: OK. With your acquisitions goals for 2003, can you talk a little
bit, expand a little bit more on as far as what you had to see as far as
capital markets as far as either raising capital or bringing down debt
in 2003?
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Stuart Boesky: Stuart, why don't you address that?
Stuart Rothstein: I think certainly, if you look at our business plan Tony
during the early part of the year, as I mentioned, we still have
leverage capacity on the balance sheet to fund new acquisitions or new
originations by increasing leverage either through our existing programs
or we may add some additional debt specific programs during the year.
As we get to the latter part of the year, we may need to bring some
equity capital in to the mix. But at this point, it's unclear whether
that would be common equity capital or either of the two types of
preferred equity that we've used in the past, both the CRA preferred
which in most respects is a common equivalent or just straight preferred
which we've used in the past as well.
Tony Howard: OK. Final question is go back to the competitions comments. As
far as, especially with banks, and since we're owned by banks I guess I
can fairly comment on this, is typically are less efficient when it
comes to spreads, Stuart. So can you kind of comment on what you're
seeing as far as in the competition area? As far as is the spread
narrowing?
Stuart Boesky: The spreads narrowing because of the competition? Is that what
you're referring to?
Tony Howard: Right.
Stuart Boesky: Well I think that that actually is sort of a fair assessment
because at least a number of the new entrants are really going out of
their way to buy market share. And, you know, to a certain extent we
resist that. But also to a certain extent we have to at least through
creative means try to meet that competition.
So what we're trying to do is instead of lowering our spreads, we're
trying to come up with products that for various reasons have a higher
return on equity. You know evidencing, you
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know, our program that reduced negative arbitrage. Evidencing our match
of Fannie Mae money which is not our capital with our capital which is
more expensive.
So what we're basically doing in that type of transaction is we're
levering off of Fannie Mae's money. Therefore, we can get that much
higher in return on our money. So there are - you know there are ways
for us to maintain our profitability, but yes, we are seeing people by
market share.
Tony Howard: OK. Thank you. And again congratulations.
Stuart Boesky: Thank you.
Operator: Moving on to David Copp with RBC Capital.
David Copp: Hi, guys. Here with Jay just to follow up. With regard to the
comments you made on the RCC acquisition and the impact you expect that
to have in the volatility of your earnings. Now can you just give us a
little idea of the degree we're talking about here? You know, as we look
into say the first half of '04, and we're layering in RCC's expenses in
the first half, I mean are looking for say negative growth in the first
half and then a spike in the latter half? Or is going to be something a
little more modest?
Stuart Rothstein: I think - actually once we owed the - you know, once we own
RCC, David and if you think about it from a GAAP perspective, a lot of
the expenses that are incurred will end up being capitalized and just
offset once the revenues are received. '03 is a bit of an odd year in
that the way the deal is structured and the way RCC's business works is
a lot of the costs that are incurred in the early part of '03 are
actually born by the sellers. And a lot of the benefit of the revenue to
be received at the latter part of the year is a benefit to CharterMac.
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So it won't be as volatile in '04. What you will see in '03 though
potentially depending on when the transaction closed is, you know, sort
of the $1.65 run rate which I talked about. We may achieve a CAD number
that is meaningfully higher than that in '03 just due to timing and the
way to deal with structure.
David Copp: OK. Great. Thanks, guys.
Operator: As a final reminder, if you would like to ask a question, please press
star one.
At this time we'll take a question from Dietrik Olijslager with
Selective Insurance.
Dietrik Olijslager: Yes, hi. I was wondering if you could share some thoughts as
far as the effect of the possible dividend tax elimination on low income
housing tax credits. I'm just wondering what the possible impacts might
be on your business model?
Stuart Boesky: Yes, as you can imagine we're following that quite closely. And
it's really much too early to give you any information that would be
definitive. I can tell you what our general thoughts are about the bill.
We think that the bill first of all will in some form pass. Meaning that
there will be some relief on the dividend taxation.
We believe that we're likely to see a much watered down version of the
President's proposal. And that could take many forms. That could be
anything from a 50 percent dividend exclusion to a change in the tax
rate associated with dividends from its current ordinary income level to
something closer to a capital gains level.
So what we think is that anything that passes will be much less harmful
to the tax credit business and the bond business than what's on the
table now. There have been a number of attempts by
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various organizations and professionals to quantify the effect of the
current bill. But the sort of variation is so wide I don't think it's
useful to even talk about at this point.
So I guess to make a long story short, you know, we're minding this very
slowly. We bet it gets passed in a water downed format. And we think it
will have some impact on the value of low income housing tax credits
which will have the effect of probably causing the market to be slightly
smaller than it is today. But we don't think it's going to be anything
that's going to materially impact the marketplace or our business.
On - with respect to the effect on tax exempt bonds, again, we think
there will be some impact, but we think it's going to be rather small in
relationship to what, you know, some people think. And, you know, there
was some literature written by the muni department at Merrill Lynch that
says that it's almost going to be undetectable in the marketplace. And
they were using as their baseline case a bill passing as is. So if you
take a much water downed version and you apply their logic, at least,
there's no impact on the dividend side.
So, you know, if you take the two issues and put them side-by-side and
you say which one is ChaterMac more concerned about it's probably the
effect on tax credits. But again, I think by the time this bill passes,
it will be slight impact, it won't be a material impact.
Dietrik Olijslager: All right, thanks.
Stuart Boesky: You're welcome.
Operator: At this time, I show we do not have any further questions. Mr. Boesky,
I'd like to turn the conference back over to you over any closing or
additional remarks.
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Stuart Boesky: Well again, I'd just like to thank everyone for continuing to
follow us an have interest in our company. And like to thank everyone at
PW and CharterMac and related for making '02 a fantastic year, and for
putting together a really dynamic business plan for '03. So we look
forward to next quarter. Thank you.
Operator: Thank you. That does conclude today's conference. Thank you for your
participation and have a wonderful day.
END