Arbor Realty Trust, Inc. (ABR) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2017 Arbor Realty Trust Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would like to introduce your host for today’s conference Paul Elenio, CFO. You may begin.

Okay, thank you, Glenda, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we’ll discuss the results for the quarter and year ended December 31, 2017. 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. I am excited today to discuss this significant success we have in closing out 2017, as we always have plans and outlook for 2019. As you can see from this morning’s press release, we had a very strong fourth quarter with tremendous operating results as we continue to make significant progress in growing out our platform, increasing our brand and expanding our market presence. This has allowed us to once again increase our dividend ahead of schedule to $0.21 a share or another 11% this quarter. This is our fifth dividend increase in less than two years reflecting a 40% increase over that time period and puts our dividend at an annual run rate of $0.84 a share. Initially, we estimate a significant reduction in corporate tax rates related to our Agency Business will result in an increase earnings to around $0.04 and $0.05 a share for 2018. This significant benefit combined with a tremendous growth we experienced in the fourth quarter will allow us to continue to grow our core earnings run rate in 2018, resulting in an increase core earnings and dividends in the future. Before I turn it over to Paul to take you through our financial results, I would like to talk about some of our significant 2017 accomplishments as always our outlook for 2018. Our 2017 highlights were truly remarkable and exceeded our expectations. Some of the more significant accomplishments included significant growth in our core earnings allowing us to increase our dividend run rate to $0.84 a share representing a 24% increase in 2017, and again we remain very optimistic that we will be able to continue to provide M&A in the future. Achieving a total shareholder return of 25% in 2017, and 40% for the last two years producing record originations of $6.3 billion, a 37% increase from our record 2016 numbers, $4.5 billion from our Agency Business and $1.8 billion from our structural lending platform, increasing our transitional balance sheet portfolio of 48% for 2017 finishing at $2.7 billion. Growing our servicing portfolio to $16.2 billion, a 20% increase from 2016. Continuing to be a market leader in a non-recourse securitization arena closing three new CLOs total of $1.2 billion all with significantly improved terms resulting in substantially reduced debt cost and flexibility, effectively access to creative growth capital raising $220 million allowing us to fund our growing pipeline and substantially increase our core earnings, and increasing our market capital to over $700 million now equity base to $865 million in 2017. Again these are truly incredible results resulting in all aspect of one of the best years we’ve had since our inception and we remain extremely optimistic from our outlook for 2018. Our Agency Business continues to flourish and our 2017 results are reflective of the tremendous success we’ve had in growing our platform. We’ve originated $1.2 billion of loans in the fourth quarter and $4.5 billion in 2017 which was a new record year for us and represent 90% increase in Agency volume as compared to 2016. We also finished as a 10 top Fannie Mae best lender for the 11th consecutive year, a distinct only on the one of best lender has achieved. And with the number one spot balance for Fannie Mae and optimal balance for Freddie Mac as well. Additionally, we continue to leverage our significant origination platform and strong footprint in a GSE multifamily lending arena to increase our reach and broaden our products, allowing us to grow on a larger portion of the overall lending market and greatly enhance the value of our franchise. As a result, our pipeline remains strong and we are extremely positive about our outlook for 2018. I’m confident that we were able to duplicate or even exceed a rapidly origination numbers for 2017. The business continues to be extremely accretive to our core earnings and it’s contributed greatly to the substantial dividend growth we’ve experienced over a very short period of time. This class one has also continued to significantly diversify and increase stability and duration of our income streams. In fact the GSE income represents approximately 70% of our total 2017 income sources over 50% which is comprised of reoccurance, predictable long-dated, mostly prepayment protected servicing income from our $16.2 billion servicing portfolio with a 48 basis point de-stream and an 8 year average life. Additionally this business also provides a very durable growth platform while minimizing the potential impact of capital markets and increased volatility as we believe for all of these reasons, we should have a premium value when compared to other mortgage reach and specialty finance companies that do not have significant Agency platforms. We also have an unbelievable year on our transitioning balance sheet lending business with a continued focus on growing our balance sheet while remaining extremely disciplined in our lending approach and are continuing to improve our non-recourse financing vehicles. We originated $786 million of loans in the fourth quarter, that’s $200 million of one-off resulting in net portfolio growth of $586 million or 27% for the fourth quarter. For 2017, we originated over $1.8 billion in loans and grew our portfolio balance by almost 50%. This is a significant concern considering we grew our portfolio of 60% for all of 2016. This growth greatly exceeded our expectations has increased our core earnings run rate substantially heading into 2018 and we are extremely confident that through our deep originations network we will be able to continue to grow our transitional balance sheet portfolio in the future. Another one of the key for our success has been our ability to continue enhance our non-recourse financing vehicles which is a critical component of our business strategy. We’re very pleased to close our ninth and largest CLS securitization vehicle with $480 million of assets in December. This was a third CLO that we closed in 2007, each of which had significantly reduced pricing from previous vehicles, allowing us to generate value returns in excess of 13% in our 2017 originations. This tremendous success continues to reflect our status as a market leader in securitization arena, cultivating a loyal and long base of investors not only by a strong transaction performance and our diverse platform. We now have five non-recourse CLOs securitization vehicles off with approximately $1.5 billion of non-recourse debt with replenishment periods going out for the first three years allowing us -- not to fund our asset with non-recourse liability and generate strong solid returns on our capital. Overall, we are extremely pleased with our 2017 results and tremendous success we are having and really enhancing the value of our franchise. We are excited about our ability to continue to grow brands with our market presence, we are extremely positive about our outlook going forward, especially in our ability to continue to grow our core originating dividends, while creating more diversity, stability and predictability through our earning streams. We also believe we are significantly undervalued which provides us potential value opportunity, potential investors. We have complete financial services operating franchise which we believe differentiates us from other public lending and peers in our industry. As a result, we believe we will not only be creating a premium top tiers with a significant amount of our income sources coming from our GSE business, we believe our GSE platform should be guided more based on similar GSE ratios as other public GSE platforms which could result in a significant increase in our current valuation. I will now turn the call over to Paul Elenio to take you through our financial results.

Okay, thank you Ivan. As our press release this morning indicated, we had an incredible fourth quarter and 2017. As a result, AFFO was $20.7 million or $0.25 per share for the fourth quarter and $83.9 million or $1.04 per share for the full year of 2017. This translates into an annualized return on average common equity of approximately 11% for both the fourth quarter and full year 2017. As Ivan mentioned, we continue to put up record results and we are very pleased to have increased our dividend again this quarter. This is the fifth time we’ve increased our dividend in less than two years and represents a 40% increase over that time period. We’re also extremely pleased with our fourth quarter growth which has increased our core earnings run rate heading into 2018. Additionally as Ivan mentioned earlier, the reduction in corporate tax rates from 35% to 21% will result in an increase in our after tax earnings from our GSE business which we estimate will increase our earnings in AFFO by approximately $0.04 to $0.05 a share in 2018 as well. And we’re now more confident than ever and our ability to continue to grow our core earnings and dividends in the future, while creating a more stable, predictable and recurring income stream from the significant portion of our earnings that are coming from our Agency Business. Looking at the results from our Agency Business, we generated approximately $29 million of income for the fourth quarter. We produced strong originations in our Agency platform, closing another $1.2 billion of loans in the fourth quarter which is a 16% increase over our third quarter volume and we originated a new record $4.5 billion in loans in 2017 which is a 19% increase over our previous record originations in 2016. Our fourth quarter sales volume was also $1.2 billion which is a 13% increase over our third quarter sales volume. The margin on our fourth quarter sales was 1.48% including miscellaneous fees compared to a 1.63% all in margin on our third quarter sales due to changes in the mix and size of our loan products. And we recorded commission expense of approximately 38% in our fourth quarter gains on sale as compared to 40% in our third quarter gains. We also recorded $20.6 million of mortgage servicing rights income related to $1.2 billion of committed loans during the fourth quarter, representing an average mortgage servicing rights rates of around 1.77% compared to 2% on our third quarter committed loans of $928 million, mainly due to some larger loans in the fourth quarter that generally have lower servicing fees. Sales margins and MSR rates fluctuate primarily by GSE loan type and size therefore changes in the mix of our loan origination volumes may increase or decrease these percentages in the future. Our servicing portfolio also grew another 4% during the quarter and 20% in 2017 to $16.2 billion at December 31, with a weighted average servicing fee of approximately 48 basis points and an estimated remaining life of approximately eight years. This portfolio will continue to generate a significant predictable annuity of income going forward in excess of $75 million growth annually. Additionally, early run off in our servicing book continues to produce large prepayment fees related to certain loans that have yield maintenance provisions. This accounted for $4.9 million of prepayment fees in the fourth quarter as compared to $3.8 million in the third quarter and we received $12.7 million of prepayment fees for the full year end 2017. These fees we recorded in service revenue net of a write-off for the corresponding MSRs on these loans. We also continue to increase our interest-earning deposits with nearly 500 million of escrow balances I mean slightly less than 1-month LIBOR. These balances provide a natural hedge against rising interest rates as they will generate significant additional earnings power as rates increase. In fact for every 1% increase in interest rates, these deposits could earn an additional $5 million annually or approximately $0.05 a share in additional earnings. We did realize a benefit of approximately $6 million in our deferred tax provision in the fourth quarter related to the revaluation of our net deferred tax liability as of December 31, 2017 that is required under the Tax Cuts and Jobs Act. And as we mentioned earlier the significant reduced corporate tax rates one of the meaningful impact on our Agency Business going forward which we believe can increase our overall AFFO by approximately $0.04 to $0.05 a share in 2018. So clearly we had a tremendous 2017 in our Agency Business and as Ivan mentioned we’re also very positive on our outlook for 2018. Now I’d like to talk about the results from our transitional balance sheet lending operation. We had an incredible 2017 finishing the year with a very strong fourth quarter generating income of $7.1 million. We grew our investment portfolio to approximately $2.7 billion or 48% in 2017 originating a record $1.84 billion of new investments for the year, $786 million of which closed in the fourth quarter. This growth greatly exceeded our expectation that has increased our core earnings run rate substantially heading into 2018 and we remain extremely confident that through our deep originations network we’ll be able to continue to grow our transitional balance sheet portfolio in the future. Our $2.7 billion investment portfolio had an all in yield of approximately 6.99% at December 31 which was up from a yield of around 6.84% at September 30 mainly due to an increase in LIBOR. The average balance in our core investments increased to 2.3 billion for the fourth quarter from $2 billion from the third quarter due to the significant growth we experienced in the fourth quarter. And the average yields in these investments was 6.94% for the fourth quarter compared to 7.34% for the third quarter largely due to approximately $2 million more in accelerated fees from early runoff in the third quarter as compared to the fourth quarter as well as from lower rates in our fourth quarter origination which was partially offset by an increase in the average LIBOR rate during the quarter. The total debt on our core assets was approximately $2.24 billion at December 31 when all-in debt cost were approximately 4.83% compared to debt cost of approximately 4.48% at September 30 mainly due to an increase in LIBOR as well as from our new convertible debt offering issued in the fourth quarter which was partially offset by a reduction in interest cost associated with our nice CLO vehicle that we closed in December. The average balance in our debt facilities increased to approximately $1.9 billion for the fourth quarter from approximately $1.62 billion for the third quarter again primarily due to financing our significant fourth quarter growth. And the average cost of funds in our debt facilities decreased to approximately 4.66% for the fourth quarter compared to 4.89% for the third quarter mainly due to $1.1 million of non-cash fees we expensed related to the unwind of CLO 4 in the third quarter combined with lower borrowing cost associated with our eight CLO vehicle that we closed late in the third quarter partially offset by an increase in LIBOR. Overall net interest spreads in our core assets on a GAAP basis decreased to 2.28% this quarter compare to 2.45% last quarter and an overall spot net interest spread also decreased to 2.16% at December 31 from 2.36% at September 30 mainly due to yields in the fourth quarter runoff exceeding the yield in our fourth quarter originations as well as from our new convertible debt offering which carries a higher cost on our overall debt rate. The average leverage ratios in our core lending assets, including the trust preferred and perpetual preferred stock as equity was up to approximately 7.1% in the fourth quarter from around 67% in the third quarter and overall debt to equity ratio on a spot basis including the trust preferred and preferred stock as equity was up to 2.1:1 at December 31, from 1.5:1 at September 30 largely due to our new convertible debt offering in the fourth quarter. We recorded a loss from our equity investments of 4.7 million in the fourth quarter who was mostly due to a one-time nonrecurring expenses of $5.5 million in the fourth quarter related to our portion of a litigation settlement incurred by our residential mortgage banking joint venture which is not part of our core business. And lastly, we are pleased to report that our $50 million senior financing note was repaid in full on January 31, 2018 which completes the last step of the Agency Business acquisition that has been so transformational to our franchise. That completes our prepared remarks for this morning. And I’ll now turn it back to the operator to take any questions you may have at this time. Glenda?

[Operator Instructions] And our first question comes from the line of Rick Shane from JPMorgan. Your line is now open.

Really just want to understand two things, it feels like in the quarter there was an impact because you were doing larger transactions and that caused a little bit of margin compression on gain on sale. You also related to the Structured Business talk about lower rates on originations, is that the same thing are we seeing increased competitive pressures here?

I’ll address the transitional balance sheet and I’ll let Paul speak to the margins. In the transactional balance sheet business is extremely competitive but we’ve been extremely effective in reducing our cost of homes and creating greater flexibility and in fact doing larger loans. So we believe that we’ll able to maintain our margins, keep our credit quality, go out cheaper but because of our effective side of how we’re borrowing we could manage that extremely effectively and that continues to be our strategy. We feel we’re in a cycle now where our concern is a bit on credit. So we’re maintaining our credit standards and if anything tightening a bit but our effectiveness and our CLO as well as our banking relationships has allowed us to be extremely more competitive in the field, more flexible in the field and still build up volume. And in fact we have tremendous synergies because majority of our bridge loans and the way we use our balance sheet ends up in having Agency execution with returns then become exponential. So that side of our business although competitive I believe that we have some real strategic advantages in the market to allow us to continue to maintain our share in the market. Paul, do you want to address the margins on the Agency Business?

So Rick it’s has to do with the mix of the volume and the mix of the GSE products. I think what I have guided people in the past to is a margin of anywhere from 140 to 150 this quarter we came in just in that range a little bit lighter than the prior quarter, but it really has to do with mix. We did some large loans that carry a small margin we also did - we had more FHA sales last quarter than we did this quarter and that timing is very unpredictable with the FHA business but they carry a higher margin then the other GSE business. So it just has to do with mix of products, size of products and again I think the right range for us going forward is anywhere from one 140 to 150 on all-in margin on the GSE business. I think just to add to Ivan’s comments about the competitiveness in the Structured Business and how we’ve been able to effectively compete with the lower borrowing for us, this quarter we did have lower yields on our originations than last quarter or then the runoff but the runoff had some subordinated paper in it that ran off and they were unlevered. So they have higher growth rates but on a levered return basis we still did generate on a levered return basis for our fourth quarter originations even with the competitive pressures a 13% levered return which we think is very strong and that’s all due to the improvements we’ve made on the financing side both in the leverage and in the cost of funds reduction.

And Ivan’s question actually was a perfect segue to my follow-up which is that, we did see the leverage in Structured Business on your balance sheet increase. Are you more comfortable with the CLO structure and facet to that financing running that business with higher leverage going forward?

Yes we’re very comfortable on the CLO side with higher leverage and as we’ve talked about in the past, our CLOs are senior debt primarily and I mean a 100% senior debt, and where the execution on the senior debt that is generally an Agency take-out and size to an Agency take-out with the right structural enhancement. So we are very, very comfortable with the brief loans we are originating and we are very comfortable with the structures we have and in a way these assets fit into those structures.

And just to add to that…

Okay.

The leverage was up a little bit during the quarter for few reasons, as Ivan mentioned, we are comfortable with the increase leverage we are getting on the securitizations, with the non-recourse and very flexible. The leverage was also up a little bit because of the new convert we did and that convert really in my mind, I think, in Ivan’s mind is in view of equity capital it was growth capital for us. So it does distort a little bit the leverage, but really that was like in view of equity capital to grow.

Got it. Thank you guys very much.

Thank you. And our next question comes from the line of Jade Rahmani from KBW. Your line is now open.

Thanks very much. Can you elaborate on the comments you just made with respect to increase concern on credit?

I think there is a lot of liquidity in the market if you look in the newspapers and the credit are always in the reports. There is always another tech fund coming out. And a lot of the debt funds are competing on credit and new players, and there are two ways to compete in the market, especially if you don’t have a brand or franchise or well customer base and one is price and the other is credit and people who don’t have the footprint or the expertise tend to compete more on the credit side. We have chosen at this point where we are on the cycle to put our efforts in competing more on the price side. We have been able to do that because of capability in the debt side of the market and also the synergies with our Agency Business when we originate a loan, not only that we make the earnings on the spread we are also able to make the earnings on when we convert debt into the Agency Business, which is not reflected in our leverage returns, so we are just in a very strategic position to do it. Our balance sheet is approaching $3 billion, very sizable, gives us huge economies in the market both on the CLO side as well as with our banking relationships and our brand and our history gives us a strategic advantage. So that’s how we are able to originate more last year. That’s how we feel we will be able to maintain our market share and probably grow market share this year as well.

And are you seeing the loosening in the market driving compromises on Structured or is it on higher leverage?

I think just from a common sense standpoint the more players you have in the market the more competitive pressures that there is always some level of deterioration. So what we try and do is stay away from loose sponsors. You will see a lot of new debt funds go after some of the new sponsors. You’ll see them go a little bit on the margin, on the credit side and that’s just normal course of where we are in the cycle.

In terms of borrowers sentiment with increasing interest rate expectations, have you seen any changes in terms of transaction pipelines, any deals having to re-trade or closing is being pushed out, because fixed rate spreads have widened?

People are definitely scrambling as more capitalization in some of these transactions and people try to figure out, how to take transactions that they wanted the contract in December that they are closing now and scramble to get them done. The numbers are different, different than they anticipated. So they’re working it through. They are getting less proceeds. They are seeking more equity capital. They are doing what they can to try and make their transactions work, so it definitely -- there is definitely a mathematical adjustment going on and that have to result in some greater acquisition on some of these transactions will re-trade in the purchase, some of them are taking place now.

So in terms of the sort of outlook for the GSE business, do you think that 1Q, potentially 2Q could be soft as in terms of volumes, as everyone digests high rates and fees what the Fed as planned and then pick up later in the year?

I don’t think the GSE business is going to be bigger than year as an overall market. I think we are looking at before the increase was they were projecting the same or a little bit more. I would say that the markets going to be the same or a little bit less. We don’t know where the rest of the market is. We have a significant pipeline. Our pipeline is very consistent with last year. But I definitely think we would watch interest rates and see how that would affect the overall business. The business is broken up into, of course, the purchase business, which I think has slowed a little bit, slowed a little bit last year, but the refinance business is a very active part of the market, a lot of loans are five-year, seven-year and 10 year durations, which constantly come up for refinance. They have to be refinance, but the question is, how is that market going to be refinance, is there going to be a little more equity capitalization, are people going to change their product mix a little bit, instead going for 10-year and 12-year loan, maybe they go for shorter duration with lower interest rates. I am not sure how it’s all going to fall. But right now our pipeline is somewhat consistent with where it was last year.

Yeah. And I think I gave a little color to that Jade some numbers and Ivan is right, it’s very consistent. We did originate $350 million of loans in GSE in January. We are expecting to do another $350 million in February, so that will put us about $700 million. So I think we are on pace to do $1 billion to $1.1 billion and that puts us on pace to what we did last year and I think we will have the ability hopefully to grow that over the life of the year. As far as the numbers for the first quarter, I think, you guys, the analyst get the math. We did sell some more loans as you saw in our commentary in the fourth quarter then we expected from the Agency Business. We have a little bit less of a held-for-sale balance going into the first quarter then we normally see what is traditional. So the gain on sale dollars maybe lighter in the first quarter than they are in other quarters. But again from a volume perspective we are on a pace to do -- what we did last year and maybe even more.

Thanks. Just a big picture -- bigger picture question and actually you raised the dividend again. On the asset management side we’ve seen some companies contemplate converting to C Corp.’s and with the lower corporate tax rate. Is there any rationale to consider converting to a C Corp. considering the amount of TRS income that you are generating?

It’s something that we always consider and look at but it’s now something we’ve done an extensive analysis on it, Jade, right now we are very comfortable operating the businesses the way we are in the REIT structure. The people do get the benefit now under the new tax code with the reduced rates on the dividend being received and we have the TRS business. But we understand your point of TRS business is large and growing, something we will always look at but right now it’s not something that’s in our sites.

Thanks very much for taking the questions.

Thank you. And our next question comes from the line of George Bahamondes from Deutsche Bank. Your line is now open.

Hi, guys. Good morning. So just a question on the transitional business, I noticed $754 million in bridge loans in 4Q across about 30 year loan, it’s about $25 million on average in terms of loan size. Where there are few larger loans driving that $754 million or is it $25 million representative of [inaudible] during the quarter?

Yeah.

We are definitely be doing -- we are definitely doing larger loans. We did, I think, two significantly larger loans. So given a facility and the size of facilities, growth on our capital has allowed us to work on these larger loans. So no question that our average balance loan, I think, might have even doubled over last year. So that’s very, very beneficial and we are pleased to be able to work in that category. Paul, any comments on that?

Yeah. I think Ivan is right. We almost doubled our loan size from last year. I think last year we have an average loan size of about $12 million. This year it’s up to $20 million. We did a $1.8 billion on 93 units and last year we did 170% less than that on 70 units. Definitely our loan size has grown. To your comment, on the quarter we did have four loans that I am looking at that were greater than $50 million in the quarter and two that were greater than $100 million. So we did have some larger loans in the quarter. But, overall, our loan balance, our average loan size has grown pretty significantly an average $20 million for the year.

Great. Okay. Thanks for the color.

Thank you. And our next question comes from the line of Steve Delaney from JMP Securities. Your line is now open.

Thanks. Good morning and congratulations on an outstanding quarter and year, for sure.

Thanks.

Thanks.

Ivan, when we look at the progress, the lending progress on both sides of the business. Would you say that it is a function more of the people that you may have added or the or have or is it more a function of like the products that you have now and the technology platform? What is allowing you to drive this kind of dramatic growth in lending.

So, Steve, there is no one answer to that. We run a very diverse franchise and we have been growing our originations platform organically each year. So, I’d say, four years ago you probably had six or eight core loan originators. Today we probably have 14 to 16 core originators. All of our guys, almost all of them are homegrown. It takes three year to five years to train these guys. It takes 10 people to get to and we have made those investments. We touched on earlier the ability to do larger loans. We didn’t have the capital and we didn’t have the brand in that area. We invested in building our balance sheet and our technology and we are now seeing the benefits of doing large and larger loans. Our brand is just getting stronger and stronger and stronger. Our product diversity is getting greater and greater and greater. Five years ago we were in a Freddie Mac’s small balance and there was no program. We developed that program with Freddie Mac and we are leader in that space. So in building the business and we talk about this very frequently, we are not a mortgage REIT that just does balance sheet loans and on the treadmill where you put them on to get paid off in two year, three years, four years and you put another one on. We have an Agency Business. The synergies between Agency Business or residual business are exponential and we keep building the depth of that business and investing in it and I believe our brand is getting stronger. And the amount of business that we generate from our balance sheet that spans entire Agency Business and the amount of business now that we’re generating from the run-off from our own servicing portfolio generates a continued source of new originations and that will continue to build the bill. So we’ve invested very, very heavily in multiple aspect of our business. We are continued to do so.

That’s helpful. Thank you, Ivan. And just one other -- you covered a lot of ground already, so I won’t beat those items to death. But just one final thing, I noticed the -- for Paul. Just looking at the credit, the legacy credit Paul, the non-performing loans looks like it declined to just two loans at year end from five at September 30. Can you talk about what went on when things being repaid or reclassified to performing with account for that decrease?

Yeah. Steve, that’s great. We had one loan payoff that was non-performing. So that came out non-performing and we repaid in full. We had another loan become performing that was temporally non-performing and then we just had another loan that we had fully reserved that was non-performing and spent on the books for a long time and just clean up we wrote it off against the asset for GAAP purposes. But that’s the driving force between the two numbers from year end to 2017.

Okay. Great. And thanks for the clarity on the tax law impact. That’s helpful for us for modeling. I appreciate the time.

Thanks.

Thank you. And our next question comes from the line of Lee Cooperman from Omega Advisors. Your line is now open.

Thank you. Just three or four questions I guess getting out. One, how do you view your capital position presently, do you feel you have adequate capital or do you have more demand for or more opportunities than you have capital. Second, I think, you touch to this, Ivan, but exposure rising rates, if I assume that the Fed raised the quarter point 3 times to 4 times this. What were the net affect be on our book? Third, I assume the dividend increase you would not have undertaken unless you felt was sustainable. So back into sustainable ROE, the way you intend to run the business, what kind of returns you think you generate on the shareholders book value? And fourth just administrative question, the [ph] 6% to 8% (38:08) converge which mature in 2019, under what conditions can you call them. I know the convertible is around $835 million, but can you force conversion?

Okay. So…

I will address a couple of them and then turn it over to Paul.

Yeah. Thank you. Thank you very much and congratulations on a good year.

Thanks. Well, I will take the easy ones, of course, and leave the tough to Paul. With respect to rising interest rates, as you know we are LIBOR-based lender and when LIBOR rises, it’s actually beneficial to us, very beneficial. So we’re okay with that. We are good with that. We also have about $500 million in escrow balances and to the extent LIBOR rises on a dollar for dollar basis we increase our earnings. If LIBOR grows at one point I believe that’s about $5 million or more income, which is probably another $0.05 or $0.06 in earnings. So we are pretty well-positioned for rising interest rates relative to earnings. The key, of course, is keeping an eye on credit, making sure we have the right LIBOR caps in our books and making sure we have right bars with the right depth if there is a rise in some level of capitalization and right now our delinquency rates and our portfolio and our performance is even better than what was underwritten. So that part of our book is really in great shape. From capital, we raised a good amount of capital last year and in the proper forms. We think in order to continue to grow our book we are always looking at effective ways to raise capital whether it would be CLOs, all the debt instruments and where appropriate and if appropriate if our stock prices trading at the right level and it’s accretive to us we will always look at that. But at the moment in time we are in pretty good shape. Paul, do you want to take the rest?

Sure. So Ivan’s commentary on the rising rates, I think, is right on, but one thing I will add, Lee is, 80% -- 88% of our book is floating on the Structured side, $2.7 billion, so not only what we see a increase in earnings from the escrow balances but if LIBOR ran up 50 basis points, it’s about a $2 accretion to net interest income on our Structured book as well, because so much of it is floating, both on the debt and on the asset side. As far as your comments on the dividend, obviously, we think the dividend is very sustainable. We actually think we’ll be able to grow it in the future. We talked about in our commentary there are significant benefit we are going to receive in our Agency Business from a lower tax rates, also the growth we had at the end of the year and what we think we will be able to continue to grow our Structured book. We think the dividend is very sustainable is that a pretty pay rate, so we do think over time we will be slow and steady, but over time we will be able to continue to grow that. As far as the ROEs on the business, we have talked about this a lot, Lee, and we always said, we would like to run between 10% and 12% ROE. We came in 11% this year. Obviously, the Agency Business has a higher or even than the Structured Business, but they are interrelated and they are cohesive and they feed off each other. And we do think with the growth we had this year we have scale in our Structured portfolio, in our Structured Business, so we do think we will continue to grow that business with very incremental increase in our cost, in our compensation. So we do think there is scale in that business. We do think the additional leverage and the reduced borrowing of course could even drive a higher combined ROE going forward. So that 10% to 12%, we are right there and may be little time here we can get that even higher. So we are very comfortable operating in the 10% to 12% and hopefully even higher in the future. To your last point I think it was on the covert. I don’t believe we have the right to force a convert early, we may a couple of months prior to maturity, but that’s not something that’s in our control. We can’t force the converter early.

Good. Thank you very much for responses and good luck and congratulation on a very good 2017.

Thank you, Lee.

Thank you, Lee.

Thank you. And we have a follow-up question from the line of Jade Rahmani from KBW. Your line is now open.

Good morning. It’s actually Ryan Tomasello for Jade. Thanks for taking the follow-up. Just dovetailing off the earlier question, maybe you can quantify the amount of spread compression you have seen on the balance sheet side over the past few quarters, and perhaps, give where incremental spreads are on loans you are originating today, may be in the current quarter and the last quarter?

Can you repeat the first part of that question again I get cut off?

Just perhaps if you can quantify on the bps basis how much spread compression you have seen on the balance sheet side on incremental loans over the past few quarters?

Yeah. I would say that that’s happened over a period of time. I would say that it has been anywhere depending on the asset class where you are in the capital structure anywhere between 25 basis points to 75 basis points of spread compression on the lending side. So I would say effectively on the bridge lending side, the tightest we probably ever got was $350 million over, so maybe $350 million to $500 million was a ranged and that was tightened up from what was -- we probably never went below $400 million for a while. So we will probably $400 million to $600 million. So that’s probably the range of tightening that took place over 12 months to 18 months period of time and that’s probably where we are right now. The larger the loans, the higher quality of loans, the more pressure there is. As you know, we trust we can do a lot of smaller loans and get less spread compression on that side and that -- that hasn’t tightened as much. But I would say 25 basis points to 75 basis points is probably the range that we’ve seen.

And just going back to ROEs, despite the strong pre-expense ROEs that you saw in the low teens for the balance sheet business, it seems like after incorporating corporate overhead ROEs are running in the mid-single digits, if you look at the helpful segment breakouts that you have provide. So maybe can you outline some factors that are depressing that? You mentioned thoughts on growing the Structured Business effectively, which would further rationalize the G&A base and maybe what amount if any is being tied up in these remaining non-performing and underperforming assets?

Sure. Ryan, so it’s Paul. I think it’s a good question. But, again, the segment information is helpful and it’s a GAAP requirement. But we don’t really view the businesses that way, we view them very cohesive, very interrelated and feeding off each other, so it is not easy to allocate the expenses completely appropriate between each segment, we do our best under GAAP. But people were on both of the businesses, so it’s not easy to do that. But if you did look at the way we have presented it for GAAP, there are a couple of driving factors that I think will drive that ROE meaningful. As I mentioned in my commentary and in answers Lee question, the scalability of the business on the Structured side is very important to us to be able to grow that portfolio to get over $3 billion and not add much incremental cost to do so, we will grow that ROE significantly. The additional leverage and maybe more importantly reduce interest costs we have we will continue to generate the ROE. And as you mentioned, if you have about $100 million tied up in two legacy assets, that’s not earning any interest currently, one of them were in the process of liquidating and we are hopeful we will get that done by may be the second half of ‘18 and put that $30 million back into our flow and drive a significant return. And the other is the Lake Tahoe asset we have and we are working on monetizing that as well. So over time as we get that $100 million deployed it will take some time back into our normal flow than it will certainly help us drive a significant amount of increase in the ROE.

Okay. I do look forward to 2018 as -- I think there is less volume and I think it will put us the better position to manage our employment costs, which have been very difficult to manage in such a competitive environment. And in ‘16 and ‘17, as you know, wage has maintain a very large portion of our spent ratio and I do think that if there is a little softness in the market on our employment basis, we will be able to manage our employment costs more effectively.

Great. Thanks for taking the follow-up.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the call back over to management for closing remarks.

Well, thank you for your questions and thank you for your time and certainly support our 2017 and I really look forward to another great year at Arbor Realty Trust. Have a good day everybody.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.