Arbor Realty Trust, Inc. (ABR) Q1 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for standing by. Welcome to the Arbor Realty Trust First Quarter 2015 Earnings Conference Call. [Operator Instructions] Please note today’s conference is being recorded. I would now like to hand the conference over to Paul Elenio, Chief Financial Officer. Please go ahead.

Thank you, Karen. Good morning everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we will discuss the results of the quarter ended March 31, 2015. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions and expectations of our future performance taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor’s expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I’ll now turn the call over to Arbor’s President and CEO, Ivan Kaufman.

Thank you, Paul and thanks to everyone for joining us on today's call. As you can see from this morning's press release we had a very active and productive first quarter. We produced strong operating results and achieved some very important milestones, most significant of which was our ability to increase our dividend 15.4% to $0.15 a share which is at least one quarter earlier than we originally projected we would grow our dividend as well as a larger increase than we anticipated. Additionally and very importantly, based on our strong results and outlook for the remainder of the year, we intend to maintain this $0.15 quarterly dividend for 2015. Before Paul takes you through financial results, I would like to reflect on the many other significant accomplishments we achieved and focus on our business strategy and outlook for the remainder of 2015and 2016. As we discussed on our last call, we successfully completed the deleveraging of legacies CDOs 1 and 2 in January and expect to complete the deleveraging of CDO 3 by the end of mid-July. We also deleveraged CLO 2 in March and successfully completed our fourth CLO securitization during the first quarter. The new CLO contains 300 million of collateral with we’re able to leverage at 73%, a replenishment feature CLO II [ph] to substitute collateral for a period of two and half years, reduce pricing from our prior securitizations as well as the ability to finance non-multifamily assets. The recent unwind of a number of our securitization vehicles and continued success in adding to and improving our nonrecourse financing facilities are significant accomplishments, which is a result of substantially reduced debt costs, access to significant amounts of capital, and we are tracking these vehicles to deploy into high yield investment opportunities and have become a catalyst for substantial growth in our core earnings run rate for 2015 and beyond. Additionally we have also experienced tremendous success in increasing and improving our short-term credit facility. As noted in the b press release, in the first quarter we added two finance facilities totaling $175 million and were initially utilized to redeem two of our legacy CDO vehicles. Both of these new facilities contained reduced debt costs and increased leverage and we expect to continue to increase our capacity and reduce our debt costs on our short-term financing facilities in the future as the market continues to improve. The success we’ve had in managing and improving our liability structures is a critical component of our business strategy which has allowed us to successfully finance our investments with the appropriate balance of recourse and non-recourse debt and generate strong leverage returns on our capital while insulating us from market volatility. We’re also successful in continuing to grow our original platform while remaining extremely disciplined in our lending approach, continuing to focus mostly on multifamily whole loans, allowing us to invest in the appropriate part of the capital stack and generate strong risk-adjusted returns on our invested capital. We originated approximately $210 million of loans in the first quarter with an average yield of approximately 7.36% and generated a leverage returns of approximately 14% on these investments. We did experience approximately $175 million in run-off in the first quarter, result of an approximately $35 million of net growth in our loan portfolio during the quarter. And while it continues to be very difficult to actually predict what our run-off will be due to continue improving market conditions, the successful unwind of several of our securitization vehicles will allow us to reinvest proceeds from future run-offs directly into new investment opportunities and increase our earnings going forward. As noted in the press release, we also purchased $116 million defaulted first mortgage note during the first quarter. This was the result of a legacy position we had in the form of a B note on an asset with a carefully executed into credit agreement which allowed us to buy out the senior note that was in technical default. The purchase of this note gave us the ability to earn default interest and miscellaneous fees. The loan paid off in April and we expect to recognize approximately $6.5 million in net fees in the second quarter with the potential to earn additional fees over the next few quarters depending on how certain technical issues are resolved. We also generated approximately $17 million of additional cash from a combination of the pay-off of our B note that was unlevered and from the fees we received in April. This transaction continues to demonstrate our unique ability to monetize and extract significant value from our legacy portfolio and we are extremely pleased with our success in generating both significant income and cash flow from these investments. Between the $17 million of cash we generated from the note acquisition and the cash we generated from the successful unwind of the majority of our securitization vehicles, we’re able to increase our available cash to grow our business without an immediate need for additional capital. Currently we have approximately $150 million of cash on hand and approximately $130 million of capacity in our short-term credit facilities to fund our investment opportunities. We remain sensitive to dilution given our stock price and are very pleased with our strong liquidity position which allows us to fund our future investments and increase our earnings without dilution. Another significant first quarter item was the substantial profitability that was generated from our new investment in the residential mortgage banking business. As we mentioned on our last quarter call, we purchased 50% of our managers indirect interest in a joint venture which operates residential mortgage banking company resulting in us owning approximately 22.5% of this residential platform. This investment generated $3 million of income, or $0.06 in earnings-per-share for the first quarter. We are extremely pleased with these operating results and with our ability to diversify our revenue sources and gain access to additional markets with this investment. The first-quarter earnings from the investment exceeded our expectations and were significantly higher than we would expect to earn on a quarterly basis going forward due to a decline in interest rates from the lack of capacity in the industry during that quarter which allowed us to capture a significant amount of refinance business from our automated originations platform. And although it is difficult to actually predict what our earnings will be from this investment going forward due to changes in interest rates and other market variables, we expect our earnings to be more in the range of approximately $0.5 million to $1 million a quarter going forward. Now I would like to update you on our view of the commercial real estate market and the overall lending environment in general. There is a tremendous amount liquidity in the real estate market and as a result, the overall lending arena is extremely competitive with significant yield compression and more liberal credit and underwriting standards. Therefore we remain patient in our approach and heavily focus on reducing our debt costs and increasing our borrowing efficiencies in order to offset these factors. We feel we have done a great job to date in these areas which has allowed us to maintain our interest rates despite extremely competitive environment. Additionally the strong footprint of our managers agency platform and dominance in the market has provided us with consistent pipeline of multifamily bridge loans allowing us to maintain our originations. The excess liquidity in the market has also resulted in a higher level of run-off in our portfolio making it more challenging to be able to continue to grow our loan portfolio. Despite all of these factors, we’re very pleased with our first quarter results and our ability to grow our loan portfolio and increase our net interest spreads while maintaining our strong credit standards. In summary, we are extremely pleased with our operating results and in the many significant accomplishments we've achieved, allowing us to grow our dividend and significantly increase our earnings run rate going forward. We’re also very excited about our new investments in the residential mortgage arena which we believe will generate strong returns on our invested capital and contribute greatly to our earnings growth going forward as well as diversify our income streams. We will continue to work exceedingly hard on enhancing our liability structure. We will continue to access to the non-recourse securitization market when available and by increasing our capacity and reducing our debt costs on our financing facilities. We also remain confident in our ability to continue to generate strong revenue returns on our capital which will result in future growth in both our earnings and dividend and allow us to ultimately achieve the long-term goal of increasing shareholder value. I will now turn the call over to Paul to take you through the financial results.

Thank you, Ivan. As noted in the press release and as Ivan mentioned earlier, we had a very successful quarter, including growing our dividend to a $0.60 target for 2015, which is a 15% increase over the $0.52 we paid in 2014. Net income for the first quarter was $15 million or $0.30 per share and AFFO was $18.2 million or $0.36 per share adding back depreciation expense and non-cash stock compensation expense. We successfully delevered two of our legacy CDO vehicles and one of our CLO securitizations during the quarter resulting in us recording net non-cash income of approximately $4.7 million. AFFO without these items was $13.5 million or $0.26 per share which generated a return on average common equity of approximately 12% for the quarter. We also had some additional significant items in the first quarter, including recording approximately $4 million in gains from the successful sale of some of our OREO assets as well as a recognition of approximately $3 million of income from our joint venture investment in the residential mortgage business that we made during the quarter. Additionally we recorded $1 million in loan loss reserves on two assets during the quarter and we now have approximately $116 million of loan loss reserves representing approximately 7% of the UPB of our loan portfolio at March 31, 2015. Looking at the rest of the results for the quarter, the average balance in our core investments was flat at approximately $1.64 billion for both the first and four quarters despite higher originations than run-off for the first quarter due to the full effect of our fourth quarter run-off as well as from the timing of our first quarter originations. The yield on these core investments increased to 6.71% for the first quarter from 6.43% for the fourth quarter largely due to an increase in accelerated fees from earlier run-off during the first quarter as compared to the fourth quarter. And the weighted average loan yield on our portfolio decreased slightly to around 6.07% at March 31, 2015 compared to around 6.16% at December 31 2014 mostly due to yields on our first quarter run-off exceeding yields on our first quarter originations. Additionally, as Ivan mentioned, we did purchase a $116 million defaulted senior note during the quarter which paid off in April and as a result, we expect to record approximately $6.5 million in net fees in the second quarter related to this transaction with the potential to earn additional fees in the future. The average balance on our debt facilities also remained flat at approximately $1.20 billion for both the first and fourth quarters. The average cost of funds in our debt facilities increased to approximately 4.71% for the first quarter compared to 4.56% for the fourth quarter largely due to $2 million of deferred fees that were accelerated into interest expense when we unwound our securitization vehicles in the first quarter compared to approximately $1 million in fees from securitization unwind in the fourth quarter. Without these fees, our average debt costs decreased to 4.04% for the first quarter compared to 4.21% for the fourth quarter, largely due to reduced debt costs from our securitization unwind. And our estimated all-in debt cost was down substantially to approximately 3.81% at March 31, 2015 compared to around 4.07% at December 31, 2014 again mainly due to the significant reduction in debt costs from the deleveraging of our securitization vehicle. If you were to include the dividend associated with our perpetual preferred offerings as interest expense, our average cost of funds, excluding deferred fees from our securitization unwind, would be approximately 4.35% for the first quarter and approximately 4.50% for the fourth quarter and our estimated all-in debt costs would be 4.12% at March 31, 2015 compared to 4.36% at December 31, 2014. Again this reduction in interest expense is due to the substantially reduced debt costs associated with our securitization unwind in the first quarter. Overall net interest spreads in our core assets on a GAAP basis, without the securitization unwind fees, increased from 2.22% last quarter to 2.67% this quarter. Including the preferred stock dividend to debt costs, our average net interest spreads also increased from approximately 1.93% last quarter to approximately 2.36% this quarter largely due to significantly more fees from accelerated run-off during the first quarter combined with reduced debt cost associated with our securitization unwind in the first quarter. And our overall spot net interest spread, including the preferred stock dividend to debt costs, increased to 1.95% at March 31 compared to 1.80% at December 31, 2014, again due to substantially reduced debt cost associated with redeeming our securitization vehicle. And our average leverage ratio in our core lending assets remained relatively flat at approximately 62%, including the trust preferreds and perpetual preferred stock as equity for both the first and fourth quarter. Our overall leverage ratio on a spot basis, including the trust preferreds and preferred stock as equity was also flat at 1.6 to 1 at both March 31 2015 and December 31, 2014. Next, NOI related to our OREO assets increased approximately $2.3 million compared to last quarter due to the seasonal nature of income related to a portfolio of hotels that we own which produced substantially Arbor income in the first two quarters of the year. Additionally as I discussed earlier, we sold two of our OREO assets in the first quarter generating gains of approximately $4 million and therefore expect to reduce NOI for all of 2015 on our OREO assets of approximately $3 million, $3.5 million. Operating expenses were up compared to last year primarily due to the vested portion of annual restricted stock grants issued to our directors, employees and employees of our manager in the first quarter. Comparatively last year’s annual restricted stock grants were issued in the second quarter. We did have some changes to the right side of the balance sheet this quarter, including CLO debt declining by approximately 244 million mainly due to the redemption of two of our legacy CDO vehicles in the first quarter which also accounts for the majority of the $218 million increase in our short term debt from adding two new facilities to finance the bulk of the loans that were in these vehicles. Additionally, CLO debt decreased by $42 million during the quarter due to the issuance of our fourth CLO partially offset by the redemption of CLO 2 in the first quarter. Also restricted cash decreased $191 million during the quarter largely due to the utilization of deployable cash in our CLO vehicles to fund new loan originations and previously unlevered assets. Lastly, our loan portfolio statistics as of March 31, showed that about 68% of the portfolio was variable rate loans, 32% was fixed. On product type of about 84% of our portfolio are bridge loans, 6% junior participations and 10% mezzanine and preferred equity. By asset class 68% are multi-family assets, 19% are office, 9% land and 4% hospitality. Our loan to value is around 74% and geographically we have around 22% of our portfolio concentrated in New York City. That completes our prepared remarks for this morning and I will now turn it back to the operator to take any questions you may have at this time. Karen?

[Operator Instructions] Our first question comes from the line of Steve DeLaney from JMP Securities.

I’d like to start with the equity investment in the mortgage banker. I am looking at the balance sheet and I see 21 million in investments in equity affiliates and in the K, you disclosed I believe that you bought 50% of managers interest in the mortgage banking company for about 10 million in the first quarter. So, Paul, help me understand, is the 21 million – does that represent just the resi mortgage bank or are there any other additional equity investments included there?

Hey Steve, yes, it does include some other investments but the reason that number went up so much during the quarter is we did invest $9.6 million for a 22.5% interest in the resi platform during the first quarter. As also we disclosed, we bought – we put $3.6 million into this joint venture to purchase our share of the non-qualified business as well, there is a qualified mortgage business and non-qualified mortgage business. In addition, we did earn $3 million and under the equity method of accounting, that $3 million gets added to the investment as the income increases your investment size. So that’s why that investment has gone up so much. It’s a combination of the 9.6 million that we invested in the qualified business, the 3.6 million in the non-qualified business, plus the 3 million of earnings. In addition, there’s some other items in there, you can go to the Q and – but that is the material amount of – material part of the $21 million.

And yes, I was going to ask you what your accounting method was being 22, I didn’t know whether you’d just have to wait and receive cash dividends but it’s good to know you can do this on the equity method as you go along.

Correct.

And the split between the two, I guess just for legal reasons, the mortgage banking company has two different corporations and so you have an interest – you have a larger interest, then I guess the qualified, the 22.5 million, the 3.6 million, what percentage is that in the NQM business?

Well it’s all the same, it’s all through one joint venture. The NQM business, as you know Steve, is a business that you are investing and purchasing non-qualified mortgages and then you are working to get leverage on that and then working to ultimately exit down the road. So that 3.6 million is just our share of the funding of those non-qualified mortgages but the percentages are the same from a standpoint of ownership.

I see. So but you add the two, the 9.6 and the 3.6 together that represents your total investment.

Correct.

So shifting over to real estate and you’d told us you had about 14 million on the balance sheet held for sale from OREO and cleaned all that up in the first quarter. So when we look at the remaining real estate owned of $84 million, should we view that as core? I mean do you like to join there or as you work through trying to improve the NOI from these properties, could we expect any of that 84 million to become held for sale in the future?

Sure. So what I did guide in my prepared remarks is we don’t know what the future will hold on those assets from the standpoint of monetization, I will talk about that in a second. We expect to earn for all of 2015 including the first quarter about 3 million to 3.5 million of NOI which we view clearly as core because that is basically in lieu of interest on those assets that we converted to OREO. As far as if any of those assets can become held for sale and monetized, I think we talked about this last year and I will also let Ivan chime in on this. The market has been extremely aggressive and competitive. We’ve done a great job in certain of these OREO assets that’s really stabilizing them and getting the NOIs up, and although we like the NOI in these assets to the extent that people are willing to pay a nice multiple on the assets we certainly have only listened, certainly the market has improved, we’ve seen assets trade at a very strong multiple and if we continue to see that, we could sell some of those assets down the road. So right now it’s hard for me to tell you but the market has been very very strong in these types of assets.

Yes, I mean just in summary, if we feel we have achieved the performance on these assets and the markets willing to pay us at a level, that it’s worthwhile selling, we will like these assets and we evaluate that all the time and in fact, there are often times we get unsolicited offers well above our carrying values. So we are open to disposing off some of these assets, it looks like the right economics.

Steve, I guess the way I look at that from a modelling perspective is while I will tell you know 3 million, to 3.5 million is core income from our NOI of OREO assets, if we were to sell any of those assets in the future and extracted that cash, we should be able to put that cash back out, arriving at the 14% leveraged returns that we are targeting, we talk of that as core as well.

I mean now, typically is that we do sell the assets, will the proceeds from those assets generate the same kind of returns or at the same better, and that goes into how we evaluate it.

And just to close out lastly, I mean you guys obviously have a very strong focus on multifamily and certainly securitization market has been readily available. But I am just curious we’ve seen some additional membership in the home loan bank system with the mortgage REITs and given that you are so focused on apartment lending, just wondering if you are considering that as additional funding option for you going forward?

Yes, we have evaluated that and we will continue evaluate it. And if we think it could be another alternative financing, so it is within our scope.

And our next question comes from the line of Jade Rahmani from KBW.

Regarding the competitive lending environment you cited, what do you think the immediate impact is to ABR? For example, do you expect to moderate the pace of originations at all? Do you expect to increase investments in other businesses such as the joint venture? And also where are you seeing the greatest impact from competition?

I think that we’ve seen a continued competitive pressures quarter to quarter and clearly this quarter we achieved a good level of originations with good spreads, which is very very sensitized to where the market is and not really just adjusting on the credit side. We put a lot of our focus on reducing our borrowing costs and increasing our leverage and our flexibility with our financing structures. It’s hard to predict what’s going to happen going forward but we definitely are sensitized to the current climate. With respect to the other investment opportunities, we always look at different investment opportunities. We are very fortunate to invest in originations platform, that’s performing extremely well and as this interest rate environment remains at this level, that could produce out-sized returns but that’s not how we are forecasting it but we are hopeful that we will do well there. The other flexibility we have is of course going anywhere within the capital structure, so we do have that flexibility. We are hoping that we can maintain similar level of originations that we had last year, we made a little bit of growth but overall we just like to be able to continue with the pace we did in the first quarter.

And regarding incremental yields, where would you say they are currently by the core loans you are targeting and how is that versus a quarter ago?

I think is your question – what is the spreads we are seeing and type of assets we are originating today?

Yes, versus last quarter.

I think in my commentary I laid out or Ivan’s commentary we laid out that the average yield on a gross level was 7.36% this quarter. I think it might have been slightly lower than that last year. Again that has to do with the mix of the type of assets we originate. This quarter we had a few larger mezzanine loans which drive up the gross yield but that’s not really how we look at the business, whether it’s levered or unlevered. We look at targeting a levered and unlevered return in the 13% to 14% and we were able to produce 14% leverage returns in the first quarter and we had similar returns in the fourth quarter. As long as we can get to those leverage returns, whether it’s through reduced borrowing costs, more efficiencies on the borrowings side, even if spreads tighten, that’s just our target. So we can keep those leverage returns, then we are right in the sweet spot of where we want to be.

In terms of the multifamily outlook, do you think that the GSCs are going to run into issues with their caps or do you think the FHFA will raise the caps and if the caps are not raised, does that create any incremental opportunities for the REIT?

Well we think that the cap issue should get sorted out in the next couple of weeks. We as a firm have been active with the FHFA as well as with the agencies and they are working for a solution. I think there will be some spillover into the CMBS market as spreads widen and if the marketplace is efficient, then there is a stability that would provide some bridge lending until that market comes back in line. But my feeling is that the cap issues may not get resolved to everybody’s 100% satisfaction but there will be a solution where it won’t create market disruption, and that I think will be in place over the next 30 days from how things are kind of being indicated by the FHFA right now.

And then just lastly, do you have any further clarity you could provide on expected loan prepayments for the year?

It’s difficult for us because where the market is that we do see level of prepayments, this quarter we had 175 million, we’ve not been able to guide consistently and accurately to what those prepayments are going to be. It’s all dependent on the market. I guess our feeling is we are hopeful that as Ivan said we will be able to maintain our origination levels that we were able to produce last year, maybe even grow it a bit and we are hopeful and we are predicting that our payoffs will not be as strong as in 2014 although that is very unpredictable. So the good news, although we can’t predict the run-off, the good news is now that we’ve delevered pretty much all of our securitization vehicles, as loans run off we get access to that cash to redeploy. So if we find the opportunities we will redeploy it, not we’re sitting on a little more cash, but we don’t feel it’s not as negative as it was in 2014 where it was reducing our legacy vehicles and really driving down the margins because that cash was trapped. So if there is a higher level of repayment, we will get access to that cash, we think if we find opportunities to put it out, we will, if not, then we will evaluate it then. But it’s really difficult to accurately predict what our run-offs are going to be.

Our next question comes from the line of Richard Eckert from MLV & Company.

Gain on the acceleration of deferred income 11 million, now I see from the Q that it had to do with the recognition of a deferred gain when you reissued bonds on two of the CDOs that you unwound in the quarter. And you indicated in the Q that there is another 8.2 million potentially that you could recognize, do you think you will be able to recognize that sometime this year?

Hey Rick, this is Paul. This is a highly technical accounting issue but simply put, when we in 2010 retired our trust preferred debt at a discount, we were unable to record the full gain from the retirement at a discount for accounting purposes, because we not only used some of our cash as currency, we used some of the CDO bonds of our own vehicles that we had purchased back way back when we owned them. The accounting basically said now that you own – when you own those bonds, you retire them. When you reissue them as currency to exchange for retirement of debt, you are now reissuing those bonds and you’ve got to reduce your gain by the estimated interest you are going to pay on those bonds over their life. The bonds had a maturity – stated maturity of 30 years although we didn’t believe and we were right, they would be out there for 30 years because the CDOs will collapse much sooner. So there was basically a $20 million deferred gain on all the bonds that we reissued when we retired our trust preferreds at a discount in 2010. We were taking that gain in ratably into income over time but over a 30-year period which was long, it went down to about 18 million by this year, 11 million of that was recognized in the first quarter when we collapsed CDOs 1 and 2 because those bonds were repaid and no longer out there. So the gain was retired. The other 8 million which will probably be down to about 7.5 million by the end of the second quarter, early third quarter will be recorded as income when we retire CDOs, Rick. So we do expect as we put in our commentary today, we are anticipating delevering CDO 3 by the end of July and if we are successful, we will bring in about 7 million, 7.5 million of that as income at that time as well.

[Operator Instructions] Our next question comes from the line of Lee Cooperman from Omega Advisors.

Real have questions in three areas. So Steve DeLaney does an excellent job of digging down into the weeds. I want to kind of be at 30,000 feet. My first question is – I mean a question I have asked almost every conference call the last couple of years and that is the way you intend to run the business, what’s your reasonable sustainable return on equity? You mentioned in the first quarter we were 12%, is that in your mind sustainable, is it below sustainable, in line with sustainable et cetera? Second question is, give you all the question at one time, what’s your reasonable payout ratio on a sustainable ROE in terms of your intentions going forward? Third, do we have dry powder, in other words, do we have unused lending capacity that would add to the ROE and earning power of the company by putting out more money that we are currently or – that have the ability to lend but are not lending? And finally, as I read your comments in the dividends, it sounds like maybe you want adjustments for the year, and that the dividend is likely to remain at this level for the rest of the year and then review it next year, is that the right read or is that not necessarily the right read?

I think with respect to the last question, that is a right read on the dividend. We raised it significantly in the first quarter and we feel very comfortable to be able to maintain that for the balance of the year.

Lee, it’s Paul. To try to answer the questions you had, the one that you – first one you asked about what’s a reasonable ROE on our business. We did at 12% during the first quarter on our common equity. Obviously that was a little higher than we had in the past because of the large items we mentioned in the first quarter, the increased income from the investment in the joint venture, the sale of the OREO assets. We did mention on the call that the second quarter will be strong as well due to roughly $6.5 million of net fees that we earned on the purchase of the discounted note. We think 12% is sustainable. I think that we would be happy with anywhere from 8% to 10% for 2015 but I do think that we can grow that into 2016 because we are still – we’ve done an excellent job, the first quarter was really strong. We still have a little bit of effect of the lag of having delevered those vehicles and reducing the interest margins and now as interest margins are starting to go back up, I think those interest margins will go up significantly by the end of the year as we continue to march through the year and hopefully grow our loan book. So we think 8% to 10% is probably very reasonable for 2015 and hope obviously to grow that in 2016. As far as a reasonable payout rate on our dividend, it’s a tough analysis because we do have a substantial amount of NOLs in our book leftover from the credit crisis. We are obviously paying a dividend not based on using those NOLs, we are paying a dividend based on what our earnings are. I think a reasonable payout ratio rate is 90 – high 80s, low 90s of our earnings to leave us little bit of dry powder. And as Ivan mentioned you are reading that correctly. We have made a decision at least now unless there is any extraordinary items we aren’t aware of, that we’re going to pay $0.60 for the year and then evaluate it again next year. I think the last question you asked was, is there any dry powder in our lending and in our ability to lend more? As we did say in the call, we do have a very strong liquidity position with $115 million of cash. We’ve done a great job of delevering these vehicles and creating a significant amount of cash flow as well as from the note acquisition that paid off in the second quarter. So we do have dry powder between $115 million of cash and $130 million of capacity in our line to lend. We are cautious as we mentioned in our prepared remarks, the market is extremely competitive. There has been some real liberal credit standards out there and we are making sure that we are maintaining our high credit standards while we are holding that capital but we do have dry powder, we see in the market open up, then we see opportunities in the market to lend at a higher pace, is that correct, Ivan?

That’s correct. I mean I think that we are being conservative how we deploy that capital, if we find some real good opportunities, that could lead to some better results. But we’d rather be conservative on how we are approaching the market.

Just to summarize the long term investment which I have, it would not be unreasonable – I mean from the standpoint of an aspirational goal of getting to a 12% ROE over the next three years and given where the book value is, and your payout ratio that we could have a dividend 50% higher than it’s currently running in the few years if you execute the way you hope to execute?

I mean we have been real steady and very cautious on how we position the company and certainly it’s ambitious to get the levels that you’ve expressed but we feel if we continue to do it step by step we can head in that direction. End of Q&A

Thank you, and that concludes our question and answer session for today. I would like to turn the conference back over to management for any closing comments.

Thanks everybody for your time today. It was a great quarter for us and we are looking forward to a very exciting 2015.