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Edited Transcript of ABR earnings conference call or presentation 15-Feb-19 3:00pm GMT

Q4 2018 Arbor Realty Trust Inc Earnings Call

Uniondale Apr 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Arbor Realty Trust Inc earnings conference call or presentation Friday, February 15, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ivan Kaufman

Arbor Realty Trust, Inc. - Chairman, President & CEO

* Paul Elenio

Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Benjamin Ira Zucker

BTIG, LLC, Research Division - Analyst

* Jade Joseph Rahmani

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Ryan John Tomasello

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Stephen Albert Laws

Raymond James & Associates, Inc., Research Division - Research Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q4 2018 Arbor Realty Trust Earnings Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Paul Elenio, Chief Financial Officer. Please go ahead.

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [2]

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Okay. Thank you, 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, 2018. 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.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [3]

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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 had in closing out 2018 as well as our plans and outlook for 2019.

As you can see from this morning's press release, we had an exceptional fourth quarter with tremendous operating results, which continues to demonstrate the strength of our brand and the value of our operating franchise.

Additionally, our income stream is a very diversified and long-dated providing a predictable and reoccurring annuity of core earnings, making us very comfortable with the level of our current dividend and confident in our ability to increase our dividend in the future.

Our 2018 highlights were truly remarkable and exceeded our expectations. Some of the more significant accomplishments included generating substantial growth in our core earnings allowing us to increase our dividend twice and significantly earlier than expected to an annual run rate of $1.08 per share, which represents a 29% increase in 2018; delivering a total shareholder return of 30% in 2018 and 26% annually for the last 2 years; achieving returns on equity of in excess of 13%, a 23% increase over our 2017 returns; producing record originations of $6.8 billion, an 8% increase from our record 2017 numbers; continuing to be a market leader in the small balance lending arena; increasing our balance sheet 24% in 2018 to $3.3 billion; growing our servicing portfolio at $18.6 billion, a 15% increase from 2017; continuing to be a market leader in the nonrecourse securitization arena; closing our 10th and largest CLO totaling $560 million; and improving terms and flexibility; achieving significant economies of scale to substantially reduce debt costs in all of our borrowing facilities, allowing us to maintain levered returns in excess of 13% in an extremely competitive environment; and effectively accessing accretive growth capital raising $215 million, allowing us to fund our growing pipeline and increase our core earnings.

The considerable growth we produced in our servicing revenues, escrow earnings and net interest income from our balance sheet portfolio in 2018 has provided us with a very strong baseline of predictable and stable earnings heading into 2019. This makes us feel very comfortable with our current dividend and confident in our ability to grow our dividend in the future. We will be providing a chart with our next investor deck, detailing our income sources on a year-over-year basis. This will illustrate the quality, diversity and duration of our income streams, which differentiates us from our peers and why we believe we should be trading at a lower dividend yield than our peer group.

To highlight this further, I'd like to talk about the tremendous growth we had in both of our business platforms.

In our Agency Business, we produced significant origination volumes with strong margins, while maintaining our servicing fee and growing our servicing portfolio. We originated $1.6 billion in agency loans in the fourth quarter, which is the highest quarterly total in our history and originated a record $5.1 billion in loans in 2018, representing a 15% increase over our 2017 volumes. We also finished as a top 10 Fannie Mae DUS lender for the 12th consecutive year, a distinction only one other DUS lender has achieved. And we're once again a top small balance lender for Fannie Mae and Freddie Mac as well.

We also grew our servicing portfolio another 5% in the fourth quarter and over 35% in the last 2 years and are now at $18.6 billion. This portfolio generates a servicing fee of 45 basis points and has an average remaining life of 8.5 years, which reflects a 13% increase in duration over the last 2 years. As a result, we've created a very significant long-dated predictable annuity of income of over $80 million gross annually and growing, the majority of which is prepayment protected. In addition, this grossly resulted in increases in our escrow balances that combined with a significant increase in LIBOR has considerably increased our earnings run rate associated with these balances leading into 2019.

And these income streams, combined with the fee income we generate from our originations, has also created significant diversity and a high level of certainty in our income sources. With respect to our balance sheet business, we continue to focus on growing our loan book. We grow -- we grew this portfolio 48% in 2017 and another 24% in 2018 on $1.7 billion in new originations, and we now have a $3.3 billion portfolio heading into 2019. The income generated from these assets is a significant component of our earnings. And based on our strong pipeline, we remain confident in our ability to continue to grow this income stream in the future.

As I have discussed in the past, the market remains fiercely competitive, and we do expect this environment to continue throughout 2019. While this will result in some margin compression on our agency product, it will be somewhat offset by reduced commission expenses. We also continue to extend out the duration of our servicing portfolio and has been increasing our average loan size with larger deals that will drive down our servicing costs, creating more long-dated predictable annuity of income.

In addition, as we have talked about on our last few calls, we remain very committed to growing our presence in the single-family rental market. We believe the single-family rental market is as big as the multifamily market and at this point is very fragmented, and we're very committed to become the leader in this space. We were an active participant in the Freddie Mac SFR pilot program prior to its conclusion, and we achieved a significant amount of success in a very short period of time. And we are now investing heavily to build out the appropriate infrastructure to develop this platform, and are very pleased in our ability to generate a pipeline already. In addition, we announced earlier this week, we hired Steve Katz as Chief Investment Officer of SFR to lead and continue to develop this platform. Steve comes with over 25 years of experience in residential mortgage banking, and recently he was the Managing Director of residential loan trading and lending groups for Morgan Stanley. We are very excited to have Steve join our executive team and are looking forward to leveraging Steve's expertise in our national sales and operational platform to significantly grow this business and further diversify our lending platform.

Overall, we're extremely pleased with our 2018 results and in the tremendous success we are having in growing our business, greatly enhancing the value of our franchise and a significant return we have generated to our shareholders. Our results have been truly remarkable and have consistently outperformed our peers.

We're also very excited about our ability to continue to grow our brand, expand our market presence and feel we have created a very strong baseline of diversifying, predictable core earnings heading into 2019.

We're a complete operating franchise with a significant, diverse, capital-light Agency Business, which has allowed us to consistently increase our earnings and create more predictable stable and long-dated income streams. And again, we remain confident in our ability to continue to grow our dividend in the future, and we'll continue to work very hard to maximize the return to our shareholders.

I will now turn the call over to Paul to take you through our financial results.

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [4]

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Okay. Thank you, Ivan. As our press release this morning indicated, we had an incredible fourth quarter and full year 2018. As a result, AFFO was $28.9 million or $0.29 per share for the fourth quarter and $113.1 million or $1.21 per share for the full year 2018. Our AFFO for the fourth quarter was $0.39 per share, excluding a $10 million noncash loan loss reserve related to a land development project. It is the only remaining significant legacy asset left over from the financial crisis. And these results reflect an annualized return on average common equity of approximately 13% for both the fourth quarter and full year 2018 and 17% and 14%, respectively, excluding this legacy asset reserve. These ROEs are up significantly from the same time last year due to the substantial portion of our earnings that have been generated by our rapidly growing capital-light Agency Business and from the additional cost efficiencies we are experiencing as we continue to scale our balance sheet business.

As Ivan mentioned, we're very pleased with our ability to continue to generate core earnings in excess of our current dividend and remain confident in our ability to increase our dividend in the future.

Looking at the results from our Agency Business, we generated approximately $42 million of income in fourth quarter on approximately $1.6 billion in originations and $1.7 billion in loan sales. The margin in the fourth quarter sales was 1.13%, including miscellaneous fees compared to 1.47% -- an all-in rate of 1.47% on our third quarter sales, mostly due to some large portfolio deals that we closed in the fourth quarter, which generally have a lower margin and consequently less commission expense.

We also recorded $36 million of mortgage servicing rights income related to $1.6 billion of committed loans during the fourth quarter, representing an average mortgage servicing right rate of around 2.25% compared to 1.83% on our third quarter committed loans of $1.4 billion, mainly due to changes in our valuation assumptions related to our 2018 mortgage servicing rights.

Sales margins and MSR rates fluctuate primarily by GSE loan type, size, therefore, changes in the mix of loan origination volumes may increase or decrease these percentages in the future.

Our servicing portfolio also grew another 5% during the quarter and 15% in 2018 to $18.6 billion at December 31, with a weighted average servicing fee of approximately 45 basis points and an estimated remaining life of 8.6 years. This portfolio will continue to generate a significant predictable annuity of income going forward of around $84 million gross annually, which is up approximately $7 million on an annual basis from the same time last year.

Additionally, early runoff in our servicing book continues to produce prepayment fees related to certain loans that have yield maintenance provisions. This accounted for $5.8 million in prepayment fees in the fourth quarter, which was down from $7.5 million in the third quarter. These fees are recorded in servicing revenue, net of a write-off for the corresponding MSRs on these loans.

As Ivan mentioned, we also continue to see increases in our interest-earning deposits with over $800 million of escrow balances, which are earning slightly less than 1 month LIBOR. And with the substantial increase in interest rates, we're now earning significantly more income, approximately $9 million more in annual run rate as compared to this time last year. So clearly, we had a tremendous 2018 in our Agency Business. And as Ivan mentioned, we have positioned ourselves nicely to have a successful 2019 as well.

In our balance sheet lending operation, we grew our portfolio 24% to $3.3 billion on $1.7 billion in rate in originations in 2018. This significant growth continues to increase our core earnings run rate. And based on our current pipeline and deep origination network, we remain extremely confident in our ability to continue to grow our balance sheet investment portfolio in the future.

Our $3.3 billion investment portfolio had an all-in yield of approximately 7.66% at December 31, which is up from a yield of approximately 7.52% at September 30, mainly due to an increase in LIBOR. The average balance in our core investments was flat at just over $3.2 billion for both the third and fourth quarters, despite our fourth quarter growth, mainly due to the timing of our originations and runoff in the third quarter. And the average yield on these investments was 7.76% for the fourth quarter compared to 7.37% for the third quarter, mainly due to an increase in LIBOR and from approximately $1.5 million more in accelerated fees from early runoff in the fourth quarter as compared to the third quarter.

Total debt on our core assets was approximately $2.9 billion at December 31, with an all-in debt cost of approximately 5.24% compared to a debt cost of around 5.03% at September 30, mainly due to an increase in LIBOR.

The average balance on our debt facilities was relatively flat at approximately $2.9 billion for both the third and fourth quarters, and the average cost of funds on our debt facilities increased to approximately 5.13% for the fourth quarter compared to 4.93% for the third quarter due to an increase in LIBOR.

Overall, net interest spreads on our core assets on a GAAP basis increased to 2.63% this quarter compared to 2.44% last quarter, mainly due to more acceleration of fees from early runoff and an increase in LIBOR in the fourth quarter.

Our overall spot net interest spread was 2.42% at December 31 compared to 2.49% at September 30. And with approximately 88% of our portfolio comprised of floating rate loans, we will see an increase in our net interest income spreads if interest rates continue to rise in the future

And lastly, the average leverage ratio on our core lending assets, including the trust preferreds and perpetual preferred stock as equity was flat at approximately 79% for both the third and fourth quarters. And our overall debt-to-equity ratio on a spot basis, including the trust preferreds and preferred stock as equity was down to 2.3:1 at December 31 from 2.5:1 at September 30, mainly due to $100 million of capital we raised in December.

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. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jade Rahmani of KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [2]

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Could you provide any color on the impact of volatility that played out in December? How did your clients, your key borrowers react? Were there any deals that got postponed, pulled from the market, any repricings? And has there been any spillover so far this year?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [3]

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So -- most of the volatility was more so on the stock market side. On the interest rate side, we saw a significant decline in the 10-year, a quarter earlier, which created a surge in business. And I think maybe there was a little uncertainty as to where the market was going, so people are looking a lot down and lock in their rates to get as many transactions close as they could. So we had a great fourth quarter. I think, it was a reflection of the drop in interest rates and also people being a little concerned where volatility would be going in next couple of months. So people were pretty comfortable with where rates were at that point in time.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [4]

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Do you have any color on the mix of acquisitions versus refis in your business?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [5]

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Sure. We -- it's running pretty much the same as it's been for the last few quarters, Jade. It's about 60% refi, 40% acquisition. And it fluctuates from 50-50, 60-40, 55-45, but right now, it's about 60-40.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [6]

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And how about loans that our bridge-to-bridge financings? We've been hearing a lot about this from other mortgage REITs and debt funds? Are you seeing that as a prevalent trend in the market? And are you looking to avoid those situations? Do you see anything alarming about that?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [7]

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You mean bridge-to-bridge, where you get off of one combined with the other?

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [8]

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Yes, bridge-to-bridge.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [9]

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I think the debt funds are extremely aggressive. We've been taken out a few times on some of our bridge to other bridges. So we've seen a little bit of that. We had some runoff last quarter on a few assets that were on our books for a substantial period of time, and we did get taken out. We opted not to match those bridges. And we felt that the market on those were a little too aggressive. So you're seeing a little bit of that. Not an overwhelming amount, but definitely a little bit of that.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [10]

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Okay. On the legacy impairment, just all related to the Tahoe land asset, and -- can you just provide any color on the decision to take a charge now? And how much risk there might be related to the potential for additional impairments down the road?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [11]

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Sure. It is related to the Tahoe investment. We took a write down, which is reflective of where we're getting market feedback. We're actively in the market now that is fully entitled to bring in the development partners and/or sell it, and that reflects an analysis of where we think the market is based on the equity returns of the developers, and that's how we came about it.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [12]

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Did any softness in the current housing market play a part of that impairment?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [13]

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Yes, it did. I think that the market for luxury high-end is probably little soft there than it was a year or 2 ago. And that had -- that definitely impacted the returns that developers needed or funds needed on this asset type.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [14]

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And are you seeing a healthy amount of interest from developers in the property?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [15]

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Well, we're beginning that process. We're in the midst of that at this point in time.

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Operator [16]

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And our next question comes from Ben Zucker of BTIG.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [17]

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Looking at the gain on sale and MSR margins, it sounds like there were some onetime things impacting both of those in our 4Q '18. So is it safe to say that we should probably just model a return to the more normalized historical level going forward?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [18]

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Ben, it's Paul. And I have been weighing on the market, but I think there's a couple of things there, you're right. There were some larger portfolio deals we did get done in the fourth quarter, which carries lower margins, but consequently, lower commission expense, so that played a role. But I think in our commentary and Ivan's commentary, we did lay out that we do think the market continues to be fiercely competitive and we may start to see a little compression in our margins. It will not be where it was for the fourth quarter, but there could be some compression on margins going forward. However, we think some of that will be offset by reduced commission expense. So it -- I don't know if we can say, we'll pencil in what we averaged for the year in '18 and '19, and may come in a little tighter than that. But it won't come in as tight as it did in the fourth quarter. That was an anomaly with some larger deals we have.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [19]

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Okay, that sounds goods. And then at the end, everything's -- the compensation's off the net revenue, so that will kind of be a sliding sleeve as well.

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [20]

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That's correct.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [21]

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Got you there. Can you talk about the single-family rental market and the opportunity there a little bit? I heard you mentioned, you guys were active in the Freddie Mac's pilot program. But what are the next steps there now that, that pilot program is over?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [22]

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Sure. So I have an enormous background in the single-family market side. And it's very attractive. When you look at the scale and size of that market, it's enormous. It's the same size as the multifamily market, but it's very fragmented, but it's changing. It was mostly market dominated by mom-and-pop operators, who own 1 to 10 properties. And then with the crisis, you had big people going in and buying pools, but that only accounted for a small amount. What you're seeing now is efficient operators aggregating a lot of these homes and actually building homes for rentals and it's become a bigger and bigger part of that market. In the Freddie Mac program, within a short order, I think we did about 10 to 12 different transactions, average size about $12 million and then the FHFA shut down that program. But we've a lot of traction. And there are few other players in the market that are able to aggregate and securitize. So we found that very attractive. We understand the securitization market. And we're very fortunate to be able to hire Steve Katz. I have a history with Steve Katz. He actually worked at Arbor and run on the private side, and we aggregated a very significant single-family residential platform, which he was the CEO of and ran. So he worked with me for many years. So we reached out to him. We think he has a perfect securitization background and organizational background. And in a very short order, we already began to accumulate a pipeline. We think it's a phenomenal business and with the right infrastructure, we definitely have the originations capacity and capability. We can build that out and believe it'll be a significant driver and another diverse income stream for the company and leverage off of our existing platform.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [23]

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That's great. And as far as maybe like I know, maybe getting a little ahead of ourselves, but the net returns that you could see there, I mean, do you think it's comparable to the economics of the agency multifamily originated sell and service business?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [24]

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I think that it can be comparable. Right now, the margins are pretty wide, I think, in aggregate in the collateral, we'll aggregate them and deliver similar type mid-13% to 15% return in the aggregation process. On the securitization side, we believe it could be a 1.5- to 3-point business, which is somewhat comparable to the multifamily side. So we think it's similar. And we think it's a huge market. There's no dominant force. And as that market begins to put into more, I wouldn't call it institutional, but one level down, we think it's going to grow and grow and grow.

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Operator [25]

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And our next question comes from Stephen Laws of Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [26]

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Can you maybe talk about, across your different business lines, it seems like all are doing pretty well. But with the new capital raised, kind of later in the fourth quarter, can you talk about where you expect to deploy that? And maybe how we should think about the time it'll take to deploy that capital as you put money to work?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [27]

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Sure. So clearly, we earmarked that capital to fund the growing pipeline we had on our balance sheet portfolio business. That's, obviously, we look at capital -- we look at our capital needs depending on where our pipeline is, we're expecting runoff to go and where our capital reserves are at that time. So we definitely earmark that $100 million to fund a very robust and growing pipeline. We started doing that already. I would say, it probably takes us through this quarter right out and maybe a little bit into the second quarter to fully fund that capital, but it's totally earmarked to further cap for the pipeline we have in the balance sheet business. And as we've said many times, that balance sheet pipeline continues to be robust.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [28]

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I think, there are lot of variables in this business and one is runoff. So depending on the runoff, we'll dictate how we use our capital. And I guess, in earlier question, the bridge-to-bridge situation, sometimes you can't predict that somebody is going to provide a bridge and take you out of your existing loan. That happened to us, I think, last quarter on one pretty big loan, which, by the way, we're very pleased that we no longer have it with every time. So I think, the runoff is definitely a factor. Sometimes we come across onetime opportunities that are very lucrative. We have a -- we're very nimble as a firm. And in a market like this, you just never know what's going to happen. But based on current pipeline, we have a good amount of cash on hand to fund the current pipeline and cash available on our CLOs to continue to operate our business effectively with the capital raise.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [29]

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Great. I appreciate the color on that. And is there kind of a bigger picture out of D.C.? A lot of news comes and goes as far as new regulations and impact on the housing market in the United States. Are there any specific issues there you're watching or there are developments that are taking place here in the last couple of months that have been positive for your business or will be a headwind for your business? Or can you maybe talk about the impact any new regulations out of Washington is having on your activity?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [30]

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I think it's early to see where anything is coming out. We've been battling this for the last 8 years. There's always a change, always a rumor of something happening. I think the last rumor that I heard yesterday was that the desire to do away with the 30-year mortgage, which would devastate the residential business, which is not our business. The option would be -- is that, I think, more people would be renting, that would be good for our business. But there's just too much speculation going on at this point. Of course, everybody wants to take Fannie and Freddie out of conservatorship, how do they do that, how do they impact the resi market, how do they impact the multi market, it's too early to tell. We've been going at this for 8 years and every day it's another story.

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Operator [31]

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

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [32]

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Obviously, the number that blew us away was the $1.6 billion in agency in the quarter. And we know fourth quarters usually the peak period in a year. But could you comment if there were any particularly large loans in that total? And maybe what was the largest one that you might recall that really stood out in the quarter?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [33]

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Sure, Steve. It's Paul. So as we mentioned in our commentary, yes, we had a phenomenal fourth quarter of $1.6 billion. There were probably $400 million to $450 million of portfolio deals, probably 4, 5 or 6 portfolio deals we closed in the fourth quarter that were in our pipeline, and we didn't know if they would close fourth quarter or first quarter, but they all got done in the fourth quarter. The biggest one of those portfolio deals, I think, was $150 million. So we did a couple of big portfolio deals. We had a couple of larger loans as well. But it's really driven by these portfolio deals we closed. I think from our standpoint, the $1.6 billion was tremendous, a little shocking for us as well. We expected some of that to flow over into the first quarter. And I think, as Ivan said, as rates went where they went and people got a little anxious, a lot of that got pulled forward into the fourth quarter. But as you said, this happens a lot in this industry. You've seen it in other competitors as well. Your fourth quarter is usually very, very strong, and then you reset for the first quarter, but that's the reason we had such a dominant fourth quarter.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [34]

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And just to be clear, I heard you mention the $150 million, the aggregate of all the portfolio deals was, did you say that was between $400 million and $500 million?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [35]

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Yes. That's at $400 million to $450 million.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [36]

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$400 million to $450 million. Okay, great. And Ivan, as far as what you're seeing, obviously, we're only -- well, I guess, only we're 1.5 months -- we're halfway through the first quarter now. I was -- Paul mentioned pull forward, and I was sort of thinking to that rally in the 10 year, breaking down well below 3%. I was just wondering if maybe there was any -- are you concerned about cannibalization of the usually weaker first quarter? Or you're seeing sort of steady business flows?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [37]

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I think -- I definitely think there was a little stronger fourth quarter and some pullout in the first quarter. First quarter is usually a little weak. And people on vacation, the pipeline is a little slow to build in the first couple of weeks. But we're seeing the trend in the pipeline in the last 2 weeks get back to those normal pace of building. So it's a normal first quarter, where the first 2, 3 weeks are slow and now it's back on pace.

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [38]

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Yes. I think, Steve, just help guide you a little bit, I think, if you go back and historically look at our first quarter volumes, that's probably what you see typically with us and, as Ivan said, it's a little slow in January and then it starts to build. And then as the trend, you'll see in our financial statements for the years, we've been in the resident -- the Agency Business, you'll see the first quarter a little weaker than the second quarter build, and then the third and fourth quarters are always much stronger, and that's just the way the business lays out.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [39]

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Understood. That's helpful. And one follow-up on Ben's question about the single-family rental initiative. I'm curious -- we understand that on a big picture basis and how it has comparable opportunities to the multifamily. But from an internal standpoint, I'm curious whether Steve Katz is charged with building a completely separate origination and servicing platform? Or will this overlap and utilize Arbor's current loan origination force?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [40]

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It's a good question. Initially, we'll leverage off of the infrastructure that we put in place for the Freddie Mac program right from an origination standpoint and an underwriting standpoint, the closing standpoint. We'll build out a separate unit and a separate skill set because we're going to have a broader product line and will be self-contained. From a servicing standpoint, it's our plan to augment our servicing capability up in Buffalo and keep it under the same management leadership, but build out separate skills and talent. Because we'll be doing multiple products, not just the fully stabilized asset because we'll providing bridge loans like we do on the multifamily side to get product stabilized and then securitize it. So we'll build out a full complement of step to support our entry into this space.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [41]

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That's helpful, Ivan. And should we think of the endgame being primarily to acquire aggregate these loans and then structure finance them in a way that they can be relatively long-duration investments on the REIT's balance sheet?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [42]

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I think that the duration on the aggregation side is between 12 and 24 months. People buy them, they aggregate them, they lease them up. And once they are leased, then you can do -- then you can securitize and put 5-, 7- and 10-year fixed rate product on that. That's the game.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [43]

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Okay. So -- and that product, if you were to securitize that, would that, would that -- their subordinate retain bonds provide an additional investment opportunity for the REIT's balance sheet?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [44]

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Yes. We will kind of retaining that with a good yield and also having an appropriate gain on sale.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [45]

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Great. Okay. And just one final thing is simple to think. Can you estimate with your total -- in terms of the build-out of the franchise and the platform, what was the approximate total headcount for the whole Arbor franchise at the end of the year? And how would that compare to say 1 year earlier?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [46]

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Sure, Steve. It's Paul. So in total, we're sitting with about, I think, 445 people at the end of the year, this year. And I think -- actually 468 -- it was 445 at the end of this time last year. So it's -- headcount is up 5%, it's up about 3% in the Agency Business and the rest is in the balance sheet business.

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Operator [47]

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And our next question comes from Rick Shane of JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [48]

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I also want to circle back on Ben's question, but I heard a good answer -- a clear answer on the sales margin. But I wanted to make sure we understood the MSR rate going forward. It looks like you trued up -- you talked about sort of truing up the assumption there. I'm curious if that's going to be a go-forward assumption as well?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [49]

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Sure, Rick. It's Paul. So yes, we did true-up in the fourth quarter kind of reevaluating our assumptions for our 2018 MSRs as you require to put them on as close to fair value as you can. We use an outside service to help us value it as most firms do. We do think that under the new policy and new strategy, it will be higher in the future as a result of those fair value assumptions. But obviously, that 2.25% has a cumulative adjustment in the number. So I think last, the quarter before that it was, I think, 1.83%. It may be around there or a little bit up from there going forward, depending on mix. So I think the assumptions will change the value in an upward way, but it also depends on mix of the product. Obviously, certain products are -- have higher servicing value because they have higher servicing fees than others. But if the mix stayed the same, we will see an upward trend. It just won't be 2.25% every quarter.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [50]

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Got it. So if we look at it on year-over-year basis for the years, it was 1.94% this year, it was 1.77% last year. Is 1.94% potentially a reasonable assumption going forward?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [51]

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It is, if mix doesn't change because that reflects what the new values are. So I would say, that is a good assumption if mix doesn't change.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [52]

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Perfect. Okay. And mix was essentially the same year-over-year. What was the change in assumption? Was it a change in discount rate? Or was it a change in duration?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [53]

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It was both. It was more duration than discount rate, but discount rate did play a role and it's duration and cost as well.

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Operator [54]

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And our next question comes from Jade Rahmani of KBW.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [55]

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This is actually Ryan on for Jade. With the growth that you've experienced in the Agency Business and the success you've had there, are there any issues you anticipate with respect to REIT eligibility? Perhaps you could say what percentage of the dividend or earnings is being generated by the Agency Business? Or what percent of the Agency Business is cash earnings or actually REIT qualified?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [56]

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Sure. So the way we look at it right now, I think, for the fourth quarter, Agency Business on an AFFO basis came in about 57% of our total. I think, it was close to the 60% for the year, $1.21 of AFFO. So a good part of the income, as we've talked about before on our call, is from this capital-light Agency Business, which is actually very accretive. As far as TRS eligibility and REIT eligibility, we still have lots of room because, as you know, we put a strategy early on when we purchased the Agency Business, that we're selling off a piece of the servicing as excess servicing up to the REITs, who were actually creating a significant amount of the servicing value up at the REIT level that's not taxed at the TRS level. So overall, the AFFO is roughly 60% Agency and 40% REIT. A lot of the servicing value is going back up to the REIT. So it's giving us lots of room in our eligibility on our REIT test. We're still -- we still have a lot of room and we're fine.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [57]

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Okay. And we saw that recently that Fannie announced it's raising its small balance loan program limit to $6 million from $3 million, which would be in line with Freddie Mac. So Ivan, I was just wondering what comment you can give on that in terms of the potential impacts to your addressable market and competition overall?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [58]

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Well, I think, it's very positive that Fannie Mae has moved up their small balance to compete with Freddie. It gives us more product diversity. They have some products that are a little bit better specifically on 10-year than Freddie Mac. So we believe that it just makes it a bigger mark for us. We've always been a leader with Fannie Mae in that space. We, as you know, designed the Freddie Mac program. So it just gives us another tool in our toolbox to effectively compete in the market.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [59]

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And then just a few housekeeping items. Paul, can you give the commission rate in the Agency Business? You said it was lower based on the larger portfolio deals?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [60]

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Yes. It was lower this quarter for a few reasons, mostly due to larger portfolio deals. Secondly, due to when you get to year-end, you're estimating your commissions all along, and then you kind of true-up your pool. So I think in the fourth quarter, it was about 30%. But for the year, it ran about 37%. And that's how I look at it. Obviously, if margins compress a little bit, that number could come down. But right now, it's sitting at about 37% for the year.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [61]

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And then...

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [62]

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[$18.7] million for the gain on sales.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [63]

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Okay, great. And then the average spread on balance sheet loan originations in the quarter?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [64]

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Yes, sure. I'll answer that. So we do look at it a little differently. I know you guys like to ask that question each quarter, and we have it. We look at it on a leverage return basis, obviously, because we have senior debts and subordinated paper as well. So the subordinated paper will have a higher growth interest income, but, obviously, not as leverageable. But for the quarter, we came in at just about 8% all-in with fees on the $448 million that we originated. Our leverage returns were 13.5%, which was quite impressive, considering how competitive the market is. And we'll be able to do that through scale. And obviously, through reducing all our borrowing cost in our lines. But our gross interest income on those loans yield came in at 8% for the quarter.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [65]

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And I'm guessing the 8% is -- it seems like a bit high probably due to some mix. Any chance you could say for like the standard bridge versus mortgage product? Where our spreads currently are today in the market? Or where they were in the fourth quarter?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [66]

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Yes. I'll let Ivan comment on where spreads are right now in the market. But I think, to your point, it is a little bit of mix. 90% of the loans we originated in the quarter were senior debt, with bridge loans 10% were subordinated paper. So that does impact it. As I said, the 10% carries a much higher gross yield. But again, we look at it from a leverage return perspective, and then from a leverage return perspective 13.5% and a little bit over 13% for the year was a really strong year for us. But Ivan can give more color on where we think spreads are right now on that structured product.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [67]

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Yes. I think it spreads on bridge debt. Senior debt is definitely very, very tight and extremely competitive. And we've been effective in reducing our borrowing cost and getting more efficient leverage, so maintaining our yields. On the other hand, LIBOR is going up. So the growth rate is going to inch up as LIBOR is inching up. So we've been able to maintain the kind of yields that we need to in order to be an effective operator, but that's been by creating other efficiencies to offset the spread compression.

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Operator [68]

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And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Ivan Kaufman for closing remarks.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [69]

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Well, thank you, everybody, for your good questions and your participation the entire year. It was an outstanding year. We're pretty thrilled about our baseline starting point for 2019 numbers really support a great dividend and the opportunity to grow our dividend for 2019 and forward. Thanks, everybody. Have a good day.

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Operator [70]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.