Arbor Realty Trust Inc (ABR) 2017 Q4 法說會逐字稿

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 will discuss the results for the quarter and year ended December 31, 2017.

With me on the call are 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 conditions, 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 everyone for joining us on today's call. I'm very excited today to discuss the significant success we have in closing out 2017 as well as our plans and outlook for 2018. As you can see from this morning's press release, we had a very strong fourth quarter with tremendous operating results as we continued 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 2 years, reflecting a 40% increase over that time period, and puts our dividend at an annual run rate of $0.84 a share.

Additionally, we estimate that the significant reduction in corporate tax rates related to our Agency Business will result in an increase to our core earnings of around $0.04 to $0.05 a share in 2018. This significant benefit, combined with the 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 increased 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 well as 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'll be able to continue to grow our dividend in the future; achieving a total shareholder return of 25% in 2017 and 40% for the last 2 years; producing record originations of $6.3 billion, a 37% increase from our record 2016 numbers, $4.5 billion from our Agency Business and over $1.8 billion from our structured lending platform; increasing our transitional balance sheet portfolio 48% in 2017 to $2.7 billion; growing our servicing portfolio to $16.2 billion, a 20% increase from 2016; continuing to be a market leader in the nonrecourse securitization arena, closing 3 new CLOs totaling $1.2 billion, all with significantly improved terms resulting in substantially reduced debt cost and flexibility; effectively accessed accretive growth capital, raising $220 million, allowing us to fund our growing pipeline and substantially increase our core earnings; and increasing our market cap to over $700 million and our equity base to $865 million in 2017.

Again, these are truly incredible results representing in all aspects one of the best years we have had since our inception, and we remain extremely optimistic about 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 originated $1.2 billion in loans in the fourth quarter and $4.5 billion in 2017, which was a new record year for us and represents a 19% increase in agency volume as compared to 2016.

We also finished as a Top 10 Fannie Mae Dus Lender for the 11th consecutive year, a distinction only 1 other Dus Lender has achieved, and we were the #1 Small Balance Lender for Fannie Mae and a top Small Balance Lender for Freddie Mac as well.

Additionally, we continue to leverage our significant originations platform and strong footprint in the GSE multifamily lending arena, to increase our reach and broaden our products, allowing us to garner 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, and confident that we will be able to duplicate or even exceed our record originations number from 2017.

This business continues to be extremely accretive to our core earnings, and has contributed greatly to the substantial dividend growth we have experienced over a very short period of time.

This platform has also continued to significantly diversify and increase the stability and duration of our income streams. In fact, our GSE income represents approximately 70% of our total 2017 income sources, over 50% of which is comprised of recurring and predictable, long-dated, mostly prepayment-protected servicing income from our $16.2 billion servicing portfolio with a 48 basis point fee stream and an 8-year average life.

Additionally, this business also provided a very durable growth platform while minimizing the potential impact of capital markets and interest rate volatility, and we believe from all of these reasons we should trade at a premium value when compared to other mortgage REITs and specialty finance companies that do not have a significant agency platform.

We also had an unbelievable year in our transitional balance sheet lending business with a continued focus on growing our balance sheet while remaining extremely disciplined in our lending approach and on continuing to improve our nonrecourse financing vehicles. We originated $786 million of loans in the fourth quarter and experienced $200 million of runoff, 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 growth, considering we grew our portfolio 16% for all of 2016. This growth greatly exceeded our expectations, and has increased our core earnings run rate substantially heading into 2018. And we're 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 keys to our success has been our ability to continually enhance our nonrecourse financing vehicles, which is a critical component of our business strategy.

We're very pleased to have closed our ninth and largest CLO securitization vehicle with $480 million of assets in December. This was the third CLO that we closed in 2017, each of which had significantly reduced pricing from previous vehicles, allowing us to generate levered returns in excess of 13% on our 2017 originations. This tremendous success continues to reflect our status as a market leader in the securitization arena, cultivating a loyal and growing base of investors that highly value our strong transaction performance and our diverse platform.

And we now have 5 nonrecourse CLO securitization vehicles up with approximately $1.5 billion of nonrecourse debt, with replenishment periods going out as far as 3 years, allowing us to appropriately match-fund our assets with nonrecourse liabilities and generate strong levered returns on our capital.

Overall, we're extremely pleased with our 2017 results and in the tremendous success we are having in greatly enhancing the value of our franchise. We're also very excited about our ability to continue to grow our brand, and expand our market presence and we're extremely positive about our outlook going forward, and especially in our ability to continue to grow our core earnings and dividends, while creating more diversity, stability and predictability to our earning streams. We also believe we are significantly undervalued which provides a substantial value opportunity for potential investors. We're a complete financial services operating franchise, which we believe differentiates us from many other public lenders and peers in our industry. As a result, we believe, we should not only be trading at a premium to our peers but with a significant amount of our income source is coming from our GSE business, we believe our GSE platform should be valued, more based on the similar P/E ratios as other public GSE platforms, which would result in a significant increase to 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 2017. This translates into an annualized return in 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 2 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 and AFFO by approximately $0.04 to $0.05 a share in 2018 as well.

And we're now more confident than ever in our ability to continue to grow our core earnings and dividends in the future, while creating a more stable, predicable 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% on our fourth quarter gains on sales as compared to 40% on 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 rate 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 8 years. This portfolio will continue to generate a significant predictable annuity of income going forward in excess of $75 million gross annually.

Additionally, early runoff 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 in prepayment fees in the fourth quarter as compared to $3.8 million in the third quarter and we received $12.7 million in prepayment fees for the full year ended 2017. These fees were recorded in servicing 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, earning 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 liabilities as of December 31, 2017, that is required under the new Tax Cuts and Jobs Act. And we mentioned earlier, the significantly reduced corporate tax rates will have a meaningful impact on our Agency Business going forward, which we believe could 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 expectations, and has increased our core earnings run rate substantially heading into 2018. And we remain extremely confident that through our deep origination 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 yield on 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 on our fourth quarter originations, 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, with an all-in debt cost of approximately 4.83% compared to a 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 ninth CLO vehicle that we closed in December. The average balance on 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 on our debt facility decreased to approximately 4.66% for the fourth quarter compared to 4.89% for the third quarter, mainly due to $1.1 million of noncash fees we expensed related to the unwind of CLO 4 in the third quarter, combined with lower borrowing costs associated with our eighth 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 compared to 2.45% last quarter, and our overall spot net interest spread also decreased to 2.16% at December 31 from 2.36% at September 30, mainly due to the yields on 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 than our overall debt rate.

The average leverage ratio on our core lending assets, including the trust preferreds and perpetual preferred stock as equity, was up to approximately 71% in the fourth quarter from around 67% in the third quarter. And our overall debt-to-equity ratio on a spot basis, including the trust preferreds 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, which was mostly due to a onetime nonrecurring expense 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 seller 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.

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? Or are we seeing increased competitive pressures here?

So I'll -- it's Ivan, and I'll address the transitional balance sheet. And I'll let Paul speak to the margins. The transitional balance sheet business is extremely competitive, but we've been extremely effective in reducing our cost of funds and creating greater flexibility in fact doing larger loans. So we believe that we've been able to maintain our margins, keep our credit quality, go out cheaper, but because of our effective side of how we borrowed we've been able to 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 them a bit, but our effectiveness in 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 our volume. And in fact we have tremendous synergies, because a majority of our bridge loans and the way we use our balance sheet ends up in having agency execution with returns that 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, you want to address the margins on the Agency Business?

Sure. So, Rick, it 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 1.40% to 1.50%. 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 larger loans that carry a smaller 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 than the other GSE business. So it just has to do with mix of products, size of product. And again, I think the right range for us going forward is anywhere from 1.40% to 1.50% on an 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 costs, this quarter, we did have lower yields on our originations than last quarter or than the runoff. But the runoff had some subordinated paper in it that ran off and they're unlevered. So they have higher gross interest 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.

Got it. Okay, and Ivan's question, actually, was a perfect segue to my follow-up, which is that, we did see the leverage in the structured business on your balance sheet increase. Are you more comfortable with the CLO structure? And the facets of 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 -- 100% senior debt, and we're -- the execution on the senior debt is generally an agency takeout and sized to agency takeout with right structural enhancements. So we're very, very comfortable with the bridge loans we're originating. And we're very comfortable with the structures we have and the way these assets fit into those structures.

And just to add a little bit. The leverage was up a little bit during the quarter for a few reasons. As Ivan mentioned, we're very comfortable with the increased leverage we're getting on the securitizations, they are nonrecourse 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, and I think in Ivan's mind, is in lieu of equity capital. It was growth capital for us. So it does distort a little bit the leverage, but really that was, like, in lieu of equity capital to grow.

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

Can you elaborate on the comments you just made with respect to increased concern on credit?

I think there is a lot of liquidity in the markets. If you look in the newspapers, printed in all the reports. There is always another tech fund coming out. And a lot of the debt funds are competing on credit, they're new players. And there're two ways to compete in the market, especially, if you don't have a brand or a franchise or loyal 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've chosen at this point where we are in the cycle to put our efforts in competing more on the price side. We've been able to do that, because of our capability in the debt side of the market and also because the synergies with our Agency Business. When we originate a loan, not only do we make the earnings on the spread, but we're also able to make the earnings on when we convert debt into the Agency Business, which is not reflected in our levered returns. So we just are 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're able to originate more last year. That's how we feel we will be able to maintain our market share, and probably grow our market share this year as well.

And are you seeing a loosening in the market, driving compromises on structure? 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. And that there's always some level of a deterioration. So what we try and do is stay away from new sponsors. You'll see a lot of the 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 retrade or closings being pushed out, because fixed rate spreads have widened?

People are definitely scrambling. There's more capitalization in some of these transactions, and people are trying to figure it out, how to take transactions that they went into contract in December that they're closing now and scramble to get them done. The numbers are different than they anticipated. So they're working it through, they're getting less proceeds. They're seeking more equity capital. They're doing what they can to try and make their transactions work. So I know there's definitely a mathematical adjustment going on, and that's going to have to result in some greater equitization on some of these transactions or retrade in the purchase price, some of which is 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 higher rates and sees what the Fed has planned? And then a pickup later in the year?

I don't think the GSE business is going to be bigger than last year as an overall market. I think we're looking at, before the rate increase was they were projecting the same, a little bit more. I would say that the market's going to be the same, a little bit less. We don't know where the rest of the market is. We've a significant pipeline. Our pipeline is very consistent with last year. But I definitely think, we'd 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 5-, 7- to 10-year durations, which constantly come up for refinance; they have to be refinanced. So the question is, how is that market going to be refinanced? Is there going to be a little more equity capitalization? Are people going to change their product mix a little bit? Instead of going for 10 and 12 year loans, may be they go for shorter duration with lower interest rates? Not sure how it's all going to fall. But right now, our pipeline is somewhat consistent with where it was last year.

Yes. And I think I could add 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're expecting to do another $350 million in February. So that will put us at about $700 million. So I think we're 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'll 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 analysts get the math. We did sell some more loans, as you saw in our commentary in the fourth quarter, than we expected from the Agency Business. So we have a little bit less of a held-for-sale balance going into the first quarter than we normally see or what is traditional. So the gain on sale dollars may be lighter in the first quarter than they are in other quarters, but again, from a volume perspective, we're on pace to do what we did last year and maybe even more.

Thanks. Just a bigger picture question and I see you raised the dividend again. On the asset management side, we've seen some companies contemplate converting to C-Corps with the lower corporate tax rate. Is there any rationale to consider converting to a C-Corps, considering the amount of TRS income that you're generating?

It's something that we always consider and look at, but it's not something we've done an extensive analysis on yet, Jade. Right now, we're 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 dividends being received, then we have the TRS business. But we understand your point, the TRS business is large and growing, it's something we'll always look at, but right now it's not something that's in our sights.

And our next question comes from the line of George Bahamondes is from Deutsche Bank.

So just a question on the transitional business. I noticed $754 million in bridge loans in 4Q across about 30 or so loans. It's about $25 million on average in terms of loan size. Were there few larger loans driving that $754 million? Or is the $25 million representative of what you originated during the quarter?

We're definitely doing larger loans. We did, I think, 2 significantly larger loans. So given our facilities and the size of our facilities, growth on our capital has allowed us to work on these larger loans. So no question that our average balance loan, I think, it might have even doubled over last year. So that's very, very beneficial. And we're pleased to be able to work in that category. Paul, any comments on that?

Yes. I think Ivan is right. We almost doubled our loan size from last year. I think, last year, we had an average loan size of about $12 million. This year it's up to $20 million. We did $1.8 billion on 93 units and last year we did 117% less than that on 70 units. Definitely our loan size has grown. To your comment on the quarter, we did have 4 loans that I'm looking at that were greater than $50 million in the quarter and 2 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 and average $20 million for the year.

And our next question comes from the line of Steve Delaney from JMP Securities.

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 have? Or is it more a function of, like, the products -- the product set you have now and the technology platform? What is allowing you to drive this kind of dramatic growth in lending?

So Steve, there's no one answer to that. We run a very diverse franchise. And we've been growing our originations platform organically. It takes years. So I'd say, 4 years ago you probably had 6 or 8 core loan originators. Today we probably have 14 to 16 core originators. All of our guys, almost all of them are homegrown. It takes 3 to 5 years to train these guys, it takes 10 people to get 2, and we've 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're now seeing the benefits of doing larger and larger loans. Our brand is just getting stronger and stronger and stronger. Our product diversity is getting greater and greater and greater. 5 years ago, we weren't a Freddie Mac small balance lender. There was no program, we developed that program with Freddie Mac, and we're the leader in that space. So in building a business, and we talk about this very frequently, we're not a mortgage REIT that just does balance sheet loans and on the treadmill where you put them on, they get paid off in 2, 3, 4 years and you put another one on. We have an Agency Business, the synergy between the Agency Business and regular 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 spins into our Agency Business. And the amount of business now, that we're generating from the runoff from our own servicing portfolio, generates a continued source of new originations, and that will continue to build and build and build. So we've invested very, very heavily in multiple aspects of our business. We will continue to do so.

That's helpful, thank you, Ivan. And just one other -- I mean, 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 nonperforming loans looks like it declined to just 2 loans at year-end from 5 at September 30. Can you talk about what went on with thing's being repaid? Or reclassified to performing which account for that decrease?

Yes, Steve, that's great. We had 1 loan payoff that was nonperforming. So that came out of nonperforming, and we got repaid in full. We had another loan become performing that was temporarily nonperforming. And then we just had another loan that we had fully reserved, it was nonperforming. It's been 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 2 numbers from year-end to 2017.

And our next question comes from the line of Lee Cooperman from Omega Advisors.

Just 3 or 4 questions if I can just get them 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 touched on this Ivan, but exposure to rising rates, if I assume that the Fed raised 0.25% 3 to 4 times this year, what will the net effect be on our book? Third, I assume the dividend increase you would not have undertaken unless you felt it was sustainable. So back into sustainable ROE, the way you intend to run the business, what kind of returns do you think you generate on the shareholders' book value? And fourth, just an administrative question, the 6.5% converts, which mature in 2019, under what conditions can you call them? I know they're convertible around $8.35. But can you force conversion?

I'll address couple of them and then turn it over to Paul. I'll take the easy ones of course, and leave the tough stuff to Paul. With respect to rising interest rates, as you know, we're a LIBOR-based lender, and when LIBOR rises it's actually beneficial to us, very beneficial. So we're okay, with that, we're 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 goes up 1 point, I believe that's about $5 million of more income, which is probably another $0.05 or $0.06 in earnings. So we're pretty well positioned for rising interest rates relative to earnings. The key, of course, is keeping an eye on credit, making sure that we have the right LIBOR caps in our books, and making sure we have the right borrowers with the right depth if there is a rise, and there's some level of capitalization. And right now our delinquency rates in 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 in the proper forms, we think, in order to continue to grow our book. We're always looking at effective ways to raise capital whether it be CLOs, or the debt instruments. And where appropriate and if appropriate, if our stock prices trading at the right level, and it is accretive to us, we'll always look at that. But at the moment in time, we're in pretty good shape. Paul, you want to take the rest?

Sure. So Ivan's commentary on the rising rates, I think is right on. The one thing I will add, Lee, is 88% of our book is floating on the structured side, the $2.7 billion. So not only will we see an increase in earnings from the escrow balances, but if LIBOR ran up 50 basis points, it's about a $2 million 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 will able to grow it in the future. We talked about in our commentary the significant benefit we're going to receive in our Agency Business from the lower tax rates. Also the growth we had at the end of the year, and what we think we'll be able to continue to grow our structured book. We think the dividend is very sustainable and is at a pretty low pay rate. So we do think, over time, we'll 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've talked about this a lot, Lee. And we've always said, we'd like to run between 10% and 12% ROE. We came in 11% this year. Obviously, the Agency Business has a higher ROE than the structured business, but they're interrelated and they're 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'll continue to grow that business with very incremental increase in our cost, in our compensation. So we do think there's 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're right there, and may be with a little time here we can get that even higher. So we're very comfortable operating in the 10% to 12% and hopefully even higher in the future. To your last point, I think, was on the convert. I don't believe we have the right to force a convert early. We may a couple of months prior to the maturity, but that's not something that's in our control. We can't force the convert early.

And we have a follow-up question from the line of Jade Rahmani from KBW.

It's actually Ryan Tomasello on for Jade. Just dovetailing off the earlier question. Maybe you can quantify the amount of spread compression you've seen on the balance sheet side over the past few quarters, and perhaps give where incremental spreads are on loans you're originating today, maybe in the current quarter, then the last quarter?

Can you repeat the first part of that question? It got cut off.

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

Yes, 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 a capital structure, anywhere between 25 to 75 basis points of spread compression on the lending side. So I would say effectively on a bridge lending side, the tightest we probably ever got was 350 over, so may be 350 to 500 over the range and that was tightened up from what was we probably never went below 400 over for a while. So -- and we will probably see 400 to 600 over. That's probably the range of tightening that took place over 12- to 18-month period of time. And that's probably where we are right now. The larger the loans, the higher quality the loans, the more pressure there is. As you know, we traffic and do a lot of smaller loans, and there's less spread compression on that side, that hasn't tightened as much. But I would say 25 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 cite 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 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 nonperforming 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's not easy to allocate the expenses completely appropriate between each segment. We do our best on the GAAP. But people work on both of the businesses. So it's not easy to do that. But if you did look at it the way we've presented it for GAAP, there are a couple of driving factors that I think will grow that ROE meaningful, as I mentioned in my commentary, and in answer to Lee's 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'll grow that ROE significantly, the additional leverage and maybe more importantly, reduce interest costs we have. We'll continue to generate the ROE. And as you mentioned, we have about $100 million tied up in 2 legacy assets, that's not earning any interest currently. 1 of them we're in the process of liquidating, and we're hopeful we'll get that done by maybe 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're working on monetizing that as well. So over time, as we get that $100 million deployed, and it will take some time, back into our normal flow then that'll certainly help us drive a significant amount of increase in the ROE.

I do look forward to 2018 as I think there is less volume and I think it'll put us in a better position to manage our employment cost, which had been very difficult to manage in such a competitive environment. And in '16 and '17, as you know, wages maintained a very large portion of our spending ratio. And I do think that if there is a little softness in the market on an employment basis, we'll able to manage our employment costs a little bit more effectively.

And that concludes our question-and-answer session for today. I'd 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, your support during 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.