Arbor Realty Trust (ABR) Q4 2017 Earnings Conference Call Transcript

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Arbor Realty Trust (NYSE: ABR) Q4 2017 Earnings Conference CallFeb. 23, 2018 10:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2017 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press *, then 0 on your touchtone telephone.

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.

Paul Elenio -- Chief Financial Officer

OK, 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 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 all these expectations in these forward-looking statements are detailed in our SEC report. 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 with the occurrences of unanticipated events.

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I'll now turn the call over to Arbor's president and CEO, Ivan Kaufman.

Ivan Kaufman -- Chief Executive Officer and Chairman

Thank you, Paul, and thanks to everyone for joining us on today's call. We're very excited today to discuss the significant success we've had 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 two years, reflecting a 40% increase over that time period and puts our dividend at the annual run rate of $0.84 a share. Additionally, we estimate that a significant reduction in corporate tax rates related to our agency business will result in an increase in our core earnings to 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 increase in 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 are 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 dividend in 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 [Inaudible] lending platform, increasing our transitional balance sheet portfolio of 48% in 2017, finishing at 2.7 billion, growing our servicing portfolios to $16.2 billion, a 20% increase from 2016. Continuing to be a market leader in the nonrecourse 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 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, resulting in all aspect of one of the best years we've had since our inception, and we remain extremely optimistic on 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 $1.3 billion in loans in the fourth quarter and $4.5 billion in 2017, which was a new record year for us and representing 90% increase in agency buy-in as compared to 2016. We also finished as a top 10 Fannie Mae best lender for the 11th consecutive year, a distinction only one other best lender has achieved, and we're the No.

1 small-balance lender for Fannie Mae and the top small-balance lender for Freddie Mac as well. Additionally, we continue to leverage our significant origination 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, the pipeline remains strong and we are extremely positive about our outlook for 2018 and confident that we're able to duplicate or even exceed our record originations number for 2017. The 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, that GSE income represents approximately 70% of our total 2017 income sources, 50% which is comprised of reoccurring, predictable, long-dated mostly prepayment-protected servicing income of $16.2 billion servicing portfolio with a 48-basis-point [Inaudible] stream and an eight-year average life. Additionally, this business also provides a very durable growth platform while minimizing the potential impact of capital-markets and interest rate volatility, as we believe for 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 significant agency platforms. We also had an unbelievable year in our transitional balance 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 nonrecourse finance vehicles.

We originated $786 million of loans in the fourth quarter and experienced $200 million of run-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 growth considering we grew our portfolio at 16% for all of 2016. This growth greatly exceeded our expectations, has increased our core-earnings run rates substantially heading into 2018, and we're extremely confident that through our deep originations network, we may 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 continue to 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, $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 [Inaudible] returns in excess of 13% in 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.

We now have five nonrecourse CLO-securitization vehicles with approximately $1.5 billion of nonrecourse debt, with replenishment periods going out as far as three years, allowing us to [Inaudible] fund our assets with nonrecourse liabilities to generate strong leveraged returns on our capital. Overall, we're extremely pleased with our 2017 results and the tremendous success we are having in greatly enhancing the value of our franchise. We're very excited about our ability to continue to grow our brand and our market presence. We're extremely positive about our outlook going forward, especially in our ability to continue to grow our core earnings and dividends while creating more diversity to building in predictability to our earnings streams.

We also believe we're significantly undervalued, which provides a substantial value opportunity to potential investors. We're a complete financial services operating franchise, which we believe differentiates us from [Inaudible] public lending and peers in our industry. As a result, we believe we should not only be trading at a premium top tier, but 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 [Inaudible] other public GSE platforms, which would result in a significant increase in our current valuation. I will now turn the call over to Paul Elenio, who'll take you through our financial results.

Paul Elenio -- Chief Financial Officer

OK, thank you, Ivan. As our press release this morning indicated, we had an incredible fourth quarter in 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 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 rate 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, 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 $1.2 billion of loans in the fourth quarter, which is a 16% increase over our third-quarter volume, and we originated 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 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, 2017, with a weight 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 gross 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 feed for the full year ended 2017. These fees were recorded in servicing revenue, net of a write-off to 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 [Inaudible]. 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 the 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 as we mentioned earlier, the significantly reduced corporate tax rates will have a meaningful impact on our agency business going forward, which we believe can increase our overall AFFO by approximately $0.45 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 would like to talk about the results from our transitional balance sheet lending operations. 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 $1.4 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 will 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% on December 31, 2017, which was up from the yield of around 6.4% on September 30, 2017, 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 in 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 run-off in the third quarter as compared to the fourth quarter, as well as from lower rates in 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 is approximately $2.24 billion at December 31, 2017, when the all-in debt costs were approximately 4.83% compared to a debt cost of approximately 4.48% at September 30, 2017, 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 costs associated with our ninth 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 to 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 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 on 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 decreased to 2.16% at December 31, 2017 from 2.36% at September 30, 2017, mainly due to the yields in the fourth-quarter run-off exceeding the yields 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 deferred 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 the spot basis including the trust preferreds and preferred stock as equity, was up to 2.1 to 1 at December 31, 2017 from 1.5 to 1 at September 30, 2017, 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 one-time nonrecurring expense of $5.5 million in the fourth quarter related to our portion of 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 acquisitions that has been so transformational for our franchise.That completes our prepared remarks for this morning, and I'll now turn back to the operator to take any questions you may have at this time. Glenda?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time if you have a question, please press the *, then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated.

And our first question comes from the line of Rick Shane from J.P.Morgan. Your line is now open.

Richard Shane -- J.P.Morgan -- Analyst

Thanks, guys, for taking my question. 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?

Ivan Kaufman -- Chief Executive Officer and Chairman

This is Ivan. 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 [Inaudible] and creating greater flexibility and in effect doing larger loans. So, we believe that [Inaudible] able to maintain our margins, keep our credit quality [Inaudible] cheaper but [Inaudible] effective side of how we borrow, 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 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, do you want to address the margins on the agency business?

Paul Elenio -- Chief Financial Officer

Sure. So, Rick, it has to do with the mix of the volume and the mix of the GSE products. I think what I've 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 larger loans that carry a smaller margin. 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 products, and, again, I think the right range for us going forward is anywhere from 140 to 150 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 run-off, but the run-off had some subordinated paper in it that ran off and they're unleveraged.

So, they have higher gross 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.

Richard Shane -- J.P.Morgan -- Analyst

Got it. OK, 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?

Ivan Kaufman -- Chief Executive Officer and Chairman

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, 100% senior debt, and where the execution on the senior debt is generally an agency takeout and sized to an agency takeout, with the 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.

Paul Elenio -- Chief Financial Officer

And just to add to add a little to that, 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're nonrecourse and very flexible. But leverage is 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, 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.

Richard Shane -- J.P.Morgan -- Analyst

Got it. Thank you, guys, very much.

Operator

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

Jade Rahmani -- Keefe, Bruyette, and Woods -- Analyst

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

Ivan Kaufman -- Chief Executive Officer and Chairman

I think there's a lot of liquidity in the markets if you look in the newspapers and [Inaudible] and all the reports, there's always another debt fund coming out, and a lot of the debt funds are competing on credit. They're new players, and there are two ways to compete in the market and especially if you don't have a brand or a franchise or a 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 and we'd been able to do that because of our capability in the debt side of the market and also 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 that into the agency business, which is not reflected in our levered returns. So we're just in a very strategic position to do it. Our balance sheet's approaching $3 billion, very sizable, due to 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 were able to originate more last year.

That's how we feel we'll be able to maintain our market share and probably grow market share this year as well.

Jade Rahmani -- Keefe, Bruyette, and Woods -- Analyst

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

Ivan Kaufman -- Chief Executive Officer and Chairman

I think from a common-sense standpoint, the more players you have in the market, the more competitive pressures, that there's always some level of 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 were are in the cycle.

Jade Rahmani -- Keefe, Bruyette, and Woods -- Analyst

In terms of borrower 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?

Ivan Kaufman -- Chief Executive Officer and Chairman

People are definitely scrambling. There's more capitalization in some of these transactions and people are trying to figure out how to take transactions that they wanted to contract in December but they're closing now and scramble to get them done. The numbers are different, 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 there's definitely a mathematical adjustment going on. That's going to have to result in some greater equization in some of these transactions or a retrade in the purchase price, some of which is taking place now.

Jade Rahmani -- Keefe, Bruyette, and Woods -- Analyst

So in terms of the sort of outlook for the GSE business, do you think that 1Q, potentially 2Q, could be soft in terms of volumes as everyone digests higher rates and sees what the Fed has planned and then a pickup later in the year?

Ivan Kaufman -- Chief Executive Officer and Chairman

I don't think that the GSE business is going to be bigger than last year as an overall market. I think what we're looking at is, before the rate increase, they were projecting the same, a little bit more. I would say that the market's going to be same, a little bit less. We don't know where the rest of the market is.

We have a significant pipeline. Our pipeline's 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 of five-, seven- 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, maybe 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.

Paul Elenio -- Chief Financial Officer

Yeah. And I think I could add a little color to that, Jade, some numbers, and Ivan's right, it's very consistent. We did originate $350 million of loans in GSE in January. We're expecting to do another 350 in February.

So that'll put us about 700. So, I think we're on pace to do 1 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-to-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.

Jade Rahmani -- Keefe, Bruyette, and Woods -- Analyst

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

Paul Elenio -- Chief Financial Officer

It is something that we always consider and look at, but it's not something we've done an extensive analysis on yet. Right now we're very comfortable operating the businesses the way we are in the restructure. People do get to benefit now under the new tax code with the reduced rates on the dividends being received and we have the TRS business. So, we understand your point.

The TRS business is large and growing. That's something we will always look at but right now it's not something that's in our sights.

Jade Rahmani -- Keefe, Bruyette, and Woods -- Analyst

Thanks very much for taking the questions.

Operator

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

George Bahamondes -- Deutsche Bank -- Analyst

Hey, guys, good morning. So, just a question on the transitional business. I noticed $754 million in bridge loans in 4Q across about 30 or so loans. That's about $25 million on average in terms of loan size.

Were there few larger loans driving that $754 million or is this $25 million representative of the loans that you originated during the quarter?

Ivan Kaufman -- Chief Executive Officer and Chairman

We're definitely doing larger loans. We did, I think, two significantly larger loans. So, given our facilities and size of our facilities, the growth of our capital has allowed us to work on these larger loans. So, no question that our average balance loan, I think it might've 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 comment on that?

Paul Elenio -- Chief Financial Officer

Yeah, I think Ivan's 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 four loans that I'm 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.

George Bahamondes -- Deutsche Bank -- Analyst

Great. OK, thanks for the color.

Operator

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

Steve Delaney -- JMP Securities -- Analyst

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

Ivan Kaufman -- Chief Executive Officer and Chairman

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, 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 home-grown. It takes three to five years to train these guys. It takes 10 people to get two, 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. Five years ago, we weren't a Freddie Mac's small-balance lender -- there was no program. But 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 two, three, four years and you put another one on.

We have an agency business. The synergies between the agency business and the 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 run-off 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 and we'll continue to do so.

Steve Delaney -- JMP Securities -- Analyst

That's helpful. Thank you, Ivan. 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, for Paul, just looking at the legacy credit, Paul, the nonperforming loans, looks like it declined to just two loans at year-end from five at September 30. Can you talk about what went on with things being repaid or reclassified to performing would account for that decrease?

Paul Elenio -- Chief Financial Officer

Yeah, Steve, that's great. We had one loan pay off that was nonperforming. So that came out of nonperforming and we were paid in full. We had another loan become performing that was temporarily nonperforming.

And then we just had another loan that we had fully reserved that was nonperforming. It's been on the books for a long time and just cleanup, we wrote it off against the asset for GAAP purposes, but that's the driving force between the two numbers from year-end 2017.

Steve Delaney -- JMP Securities -- Analyst

OK, great. And thanks for the clarity on the tax law impact. That's helpful for us for modeling. Appreciate it, guys.

Operator

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

Leon Cooperman -- Omega Advisors -- Chief Executive Officer and Chairman

Thank you. Just four questions, so 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 a quarter-point three to four times this year, what would the net effect be on [Inaudible] 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 it'll generate on the shareholders' book value? And fourth is just an administrative question. The 6.5% converts which mature in 2019 -- under what conditions can you call them? I know they convert around 835 but can you force conversion?

Ivan Kaufman -- Chief Executive Officer and Chairman

I'll address a couple of them and turn it over to Paul. [Crosstalk] I'll take the easy ones 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 OK 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 earnings. If LIBOR goes up 1 point, I believe that's about $5 million or 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 we have the right LIBOR caps on our books and making sure we have the right [Inaudible] with the right depth. If there is a rise and there's some level of capitalization, then 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, all the debt instruments, and where appropriate and if appropriate, if our stock price is trading at the right level and it's accretive to us, we're always looking at that, but at the moment in time we're in pretty good shape. Paul, do you want to take the rest?

Paul Elenio -- Chief Financial Officer

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 that dividend is very sustainable. We actually think we'll be 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 it's 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 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 costs could even drive a higher combined ROE going forward. So that 10% to 12%, we're right there and maybe 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. 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.

Leon Cooperman -- Omega Advisors -- Chief Executive Officer and Chairman

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

Operator

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

Ryan Thomas -- Keefe, Bruyette, and Woods -- Analyst

Good morning. It's actually Ryan Thomas, along for Jade. Thanks for taking the follow-up. 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 two quarters and perhaps give where incremental spreads are on loans you're originating today maybe in the current quarter and the last quarter.

Ivan Kaufman -- Chief Executive Officer and Chairman

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

Ryan Thomas -- Keefe, Bruyette, and Woods -- Analyst

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 two quarters.

Ivan Kaufman -- Chief Executive Officer and Chairman

Yeah, I would say that that's happened over a period of time. I would say that it's been anywhere, depending on the asset class, where you are in the 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 maybe 350 to 500 was the range, and that was tightened up from what was, we probably never went below four for a while. So we were probably 400 to 600.

That's probably the range of tightening that took place over a 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 in, 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 was probably the range we've seen.

Ryan Thomas -- Keefe, Bruyette, and Woods -- Analyst

And just going back to ROEs, despite the strong pre-expense ROE that you cited, 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?

Paul Elenio -- Chief Financial Officer

Sure, Ryan. 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 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 it over $3 billion and not add much incremental cost to do so, will grow that ROE significantly, the additional leverage and maybe more importantly reduced interest costs we have, will continue to generate the ROE. And, as you mentioned, we do have about $100 million tied up in two legacy assets that's not earning any interest currently.

One 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'll take some time, back into our normal flow, that will certainly help us drive a significant amount of increase in the ROE.

Ivan Kaufman -- Chief Executive Officer and Chairman

I do look forward to 2018. I think there's less volume and I think it'll put us in a better position to manage our employment costs, which have been very difficult to manage in such a competitive environment. And in 2016 and 2017, as you know, wages maintained a very large portion of our expense ratio, and I do think that if there's a little softness in the market on an employment basis, we'll be able to manage our employment costs a little bit more effectively.

Ryan Thomas -- Keefe, Bruyette, and Woods -- Analyst

Great. Thanks for taking the follow-up.

Operator

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

Ivan Kaufman -- Chief Executive Officer and Chairman

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.

Operator

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.

Duration: 52 minutes

Call Participants:

Paul Elenio -- Chief Financial Officer

Ivan Kaufman -- Chief Executive Officer and Chairman

Richard Shane -- J.P.Morgan -- Analyst

Jade Rahmani -- Keefe, Bruyette, and Woods -- Analyst

George Bahamondes -- Deutsche Bank -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Leon Cooperman -- Omega Advisors -- Chief Executive Officer and Chairman

Ryan Thomas -- Keefe, Bruyette, and Woods -- Analyst

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