Earnings Call Transcript - ABR Q2 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please begin, sir.

Paul Elenio, CFO

Okay. Thank you, Priscilla, 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 ended June 30, 2020. 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 risk and uncertainty 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 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 our Arbor's President and CEO, Ivan Kaufman.

Ivan Kaufman, CEO

Thank you, Paul and thanks to everyone for joining us on today's call. We hope that you and your families are safe and healthy, and we appreciate your participation during these challenging times. We realize the difficulties and complexities the country and the entire world continue to deal with as a result of COVID. In addition, as we all know, we are entering a recessionary period. After experiencing a ten-year run of tremendous economic growth, we as operators of this company are well prepared for the recessionary environment. We've built a viable operating platform focusing on the right asset class with very stable liability structures, strong liquidity, an active balance sheet, and a GSE agency business comprising many diversified income streams that generate strong core earnings and dividends in every market cycle. We also have nominal delinquencies and forbearances in our portfolio, and an experienced cycle-tested management team and a business model that provides many diversified opportunities for growth, which clearly puts us in a class by ourselves. Our second quarter results are a clear reflection of this strategy and the diverse platform we've developed. We had an outstanding second quarter with many significant achievements including remarkable operating results which have allowed us to increase our dividend to $0.31 a share. This is the ninth year in a row we have been able to increase our dividend, and we are confident in our ability to continue to generate core earnings in excess of this increased dividend. As Paul will discuss in more detail, our core earnings for the second quarter were $0.46 per share, which is a remarkable accomplishment and a true testament to the value of our franchise and the many diverse income streams we have created. In fact, the growth we're experiencing in our core earnings this year has already exceeded last year's pace. We realized significant benefits from our LIBOR floors, efficiencies in our CLO vehicles, an increase in our servicing fees and GSE agency volumes, substantial income from our residential business, and reductions in overhead and general and administrative expenses. As a result of these recurring benefits combined with our projected originations, strong pipeline, and the credit quality of our portfolio, we're uniquely positioned to continue to produce significant core earnings for the balance of the year despite the effects of the recession. The strong core earnings outlook has allowed us to once again increase our dividend, and we are confident in our ability to continue to produce core earnings in excess of this dividend as the dividend reflects a 13% yield based on yesterday's closing price. Prior to the pandemic just a few months ago in mid-February, we were trading at a much lower dividend yield of around 8%, which applied to our current dividend would result in a stock price of approximately $15.50 a share. We believe based on our resiliency and strong performance that we should be trading above that level. As a result, we feel this is one of the best opportunities to create shareholder value in the history of our franchise. Through our GSE agency platform, we have been very active in providing liquidity in the multifamily market. We originated $1.35 billion in GSE agency loans in the second quarter, and $2.2 billion for the first half of the year, which is up approximately 10% more origination for the first half of 2019. Our pipeline is also extremely strong, and as a result, we expect to produce strong origination volumes for the balance of the year. In this unprecedented environment, our GSE agency platform offers premium value as it requires limited capital, generates significant long-dated predictable income streams, and produces significant annual cash flow. Additionally, our $21.6 billion GSE agency servicing portfolio, which is mostly prepayment protected, generates approximately $95 million a year and growing in recurring cash flow. In addition to the strong gain on sale margins we continue to generate from our origination platform, having the ability to originate and sell loans in a liquid market with minimal required capital and produce gain on sale income, as well as new and increasing servicing revenues, will continue to contribute greatly to our core earnings and dividends. From a liquidity perspective, we are very pleased to report that we have a current cash and liquidity position of approximately $450 million, which we believe not only provides us with adequate liquidity to navigate current market conditions, but also gives us offensive capital to take advantage of creative lending opportunities. We have been very successful in increasing our liquidity position currently up by approximately $100 million since our last earnings call. In the second quarter, we issued $70 million of three-year unsecured debt in an extremely challenging environment, which continues to demonstrate the value of our franchise and the strength of our investment relationships. We successfully executed our first private label securitization in the second quarter, totaling $727 million of assets, which generated approximately $115 million of cash after repaying the short-term debt associated with these loans. We have a very strong balance sheet with a high quality portfolio and appropriate liability structures. At June 30, our balance sheet totaled $5 billion and was financed with $3.4 billion of debt. Approximately $2.5 billion or 75% of that debt is non-recourse, non-mark to market CLOs and approximately $850 million is financed through warehouse and repurchase facilities that is secured by $1.2 billion of assets with eight different banks that we have longstanding relationships with. Additionally, the majority of loans being financed in these bank lines are also rated as CLO eligible. With respect to our balance sheet portfolio, it's important to highlight that over 90% of our book consists of senior bridge loans, and most importantly approximately 80% of our portfolio is in multifamily assets, the most resilient asset class in all cycles. We believe we'll continue to outperform all other asset classes in this recession as well. Additionally, we have not provided any loan modifications with rate concessions or had any defaults to date related to our multifamily portfolio, and most of the loans in our portfolio contain interest reserves, granting us the ability to effectively manage our portfolio through this dislocation. We also have very little exposure to the asset classes that have been significantly affected by this recession, such as retail and hospitality. Our total exposure to these asset classes is less than $130 million or approximately 2.5% of our portfolio. As a reminder, we took adequate reserves against these assets in the first quarter, and I do not feel at this point that any material further impairments will be necessary, which gives us confidence that our adjusted book value of $9.40 actually reflects the current impact of this recession. We continue to see positive trends related to our GSE agency business collections, with only approximately 0.4% of our $16 billion Fannie Mae book and 6% of our $5 billion Freddie Mac loan book granted forbearance through July. These numbers are relatively unchanged since April. We have very few requests for forbearance in the last few months, which we believe reflects the strength of our borrowers and the quality of our GSE agency portfolio. With respect to servicing advances related to any potential forbearance claims, as a Fannie Mae servicer, we are required to advance principal and interest payments for a period of up to $700,000 cumulatively to-date, which has also not materially changed since last quarter. As a reminder, we have a $50 million advance facility in place with one of our larger banks at a 100% advance rate. Therefore, any further potential advance requirements will not be an issue for us. In summary, we have built a versatile operating business that is multifamily-centric, with significant diversified income streams, and is capable of generating consistent core earnings and dividends in all cycles with a proven track record for growth. We also have a strong liquidity position, the appropriate liability structures, and the asset management expertise and track record to continue to succeed in this environment and our performance speaks for itself. We believe this puts us in a class by ourselves, and investing in our company at these extremely low levels will provide a tremendous long-term return. As the largest shareholder, my primary focus will be to continue to maximize shareholder value. I will now turn the call over to Paul to take you through the financial results.

Paul Elenio, CFO

Okay thank you, Ivan. As our press release this morning indicated, we had an exceptional quarter, producing core earnings of $60.4 million or $0.46 per share, excluding $15 million of additional CECL reserves, and $38 million of tax-affected one-time swap losses on our private label securitization from the effects of the pandemic. As Ivan touched on, we had several key items that affected the numbers very positively for the second quarter, including significant benefits from our LIBOR floors, efficiencies in our debt structures, substantial income from a residential banking joint venture, and reductions in our overhead and general administrative expenses, with these expense reductions totaling approximately $8 million to $10 million annually, or $0.06 to $0.07 a share. These second quarter results clearly demonstrate the value of our operating platform and the diversity of our income streams, and more importantly, give us great confidence in our ability to continue this momentum. Our adjusted book value at June 30 was approximately $9.40 a share, adding back $80 million of non-cash general CECL reserves on a tax-effective basis. As Ivan mentioned earlier, we're not expecting any material additional write-downs at this point, giving us confidence in our adjusted book value. Looking at our results from our GSE agency business in the second quarter, we generated $14 million of core earnings and approximately $1.4 billion in origination, and $1.3 billion in loan sales. The margins on our second quarter GSE agency loan sales were 1.46%, including miscellaneous fees compared to 1.49% for the first quarter. As Ivan mentioned, we closed our first auto private label securitization in the second quarter. We accounted for this as a sale, which resulted in a gain on sale margin of around 1% on $727 million of loan sales. We also have a robust pipeline, and we expect to produce strong origination balance for the balance of the year. In the second quarter, we recorded $32 million of mortgage servicing rights income related to $1.2 billion of committed loans, representing an average MSR rate of around 2.69%, which was up significantly from a 1.73% rate for the first quarter, mostly due to a change in the mix of our second quarter loan production and from higher servicing fees on our Fannie Mae originations. Our servicing portfolio grew to $21.6 billion at June 30 with a weighted average servicing fee of 44 basis points and an estimated remaining life of nine years. This portfolio will continue to generate predictable annuity income going forward of around $95 million gross annually, which is up approximately $10 million on an annual basis from the same time last year. Additionally, prepayment fees related to certain loans that have yield maintenance provisions were $3 million for the second quarter compared to $5 million for the first quarter. In our balance sheet lending operations, we grew our portfolio to $5 billion in the second quarter on $300 million in new originations. Our $5 billion investment portfolio had an all-in yield of 6.10% at June 30, compared to 6.35% at March 31, mainly due to higher rates on runoff as compared to the new originations and from a reduction in LIBOR during the quarter, which was largely offset by LIBOR floors on the majority of our portfolio. The average balance in our core investments increased to $4.8 billion this quarter from $4.6 billion last quarter, mainly due to our first quarter growth. The average yield on these investments was 6.16% for the second quarter, compared to 6.77% for the first quarter, mainly due to more acceleration of fees from early runoff in the first quarter, higher interest rates on runoff compared to originations, and a reduction in LIBOR in the second quarter. Total debt on our core assets was approximately $4.5 billion at June 30 with all-in debt costs of approximately 3.14% compared to a debt cost of around 3.68% at March 31, due to a sharp reduction in LIBOR in the second quarter. The average balance in our debt facilities increased to approximately $4.5 billion for the second quarter from $4.25 billion for the first quarter, mostly due to the senior secured notes we issued late in the first quarter, and the average cost of funds in our debt facilities decreased significantly to approximately 3.26% for the second quarter, compared to 4.11% for the first quarter, due to a substantial reduction in LIBOR. Overall net interest spreads on our core assets increased to 2.90% this quarter, compared to 2.66% last quarter, mainly due to the positive effect of LIBOR floors on a large portion of our balance sheet portfolio. Our overall spot net interest spread was also up significantly to 2.96% at June 30 from 2.67% at March 31, again mainly due to the positive effects of LIBOR floors on our portfolio. Approximately 80% of our balance sheet portfolio has LIBOR floors between 1% and 2.5%, with an average LIBOR floor of approximately 1.9%. If LIBOR continues to stay at its current level, these LIBOR floors will continue to have a meaningful positive impact on our net interest spreads in the future. The average leverage ratio on our core lending assets, including the trust preferred and perpetual preferred stock as equity was up to 87% in the second quarter, from 85% in the first quarter, due to the timing of our new unsecured debt issuances. However, our overall debt-to-equity ratio on a spot basis was down to 3.1 to 1 at June 30, from 3.3 to 1 at March 31, excluding general CECL reserves due to the efficiencies in our CLO vehicles and using the proceeds of our unsecured debt issuances to pay down secured debt. Lastly, income from equity affiliates increased significantly during the quarter due to, as we mentioned earlier, substantially more income from our residential banking joint venture as a result of the historically low-interest rate environment. This investment contributed approximately $0.10 a share on a tax-effective basis to our core earnings for the second quarter. We do believe this investment will continue to contribute meaningfully to our core earnings going forward. And again, the income from this investment further emphasizes the diversity of our income streams and acts as a natural hedge against declining interest rates, specifically, earnings on our escrow balances. 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, Operator

[Operator Instructions] And we'll take our first question today from Steve DeLaney with JMP Securities. Your line is open.

Steve DeLaney, Analyst

Congratulations guys on a great quarter amidst this sea of uncertainty that we're facing. I'd like to start with the residential business, and I’d like to start there, obviously, a big part of the earnings speed in the quarter. I was just wondering, you've had this business for some time, and I know you've got a background in the residential market. But can you just talk specifically about how that operation, that platform may have scaled up in the last year or so that their contribution for your 22% interest has really increased, and obviously a lot of focus on that business with the Quicken IPO in the market? So, if we could start there, I'd appreciate it.

Paul Elenio, CFO

First of all, I would say it’s a business, as you know, I have a tremendous history in and that's how I started my career very successfully. We invested in this business a number of years back with the eye on it being a really good hedge for some of our other aspects of our business. As you know, when rates go down, typically that business goes up. It's a really good offset to the interest earnings on our escrow balances, and that's how we viewed it. With the drop in interest rates, we built that company with real great capacity. With the automation and technology that we have, we are able to increase and scale up without a lot of overhead. With the drop in rates, our volume has increased and our margins have improved. But we're very confident that the growth potential is very positive for the foreseeable future given the interest rate cycle.

Steve DeLaney, Analyst

The name of the platform, I remember the name Cardinal out there, but I didn't know whether that was accurate.

Paul Elenio, CFO

Yes, it's under the name Cardinal.

Steve DeLaney, Analyst

Okay, well, I was wrong. Okay. Switching over to the structured business, a little surprising that that's continued strong, just looking around the bridge loan business. The larger bridge loan business seems to have really shut down, and I'm just curious if you could comment on the nature of the borrower demands because the $300 million it didn't appear to be any large loans because you spent 20 million transactions, excuse me, 20 transactions are about $15 million average size, but just maybe comments on the demand, where are you seeing borrower demand for the bridge product?

Paul Elenio, CFO

Sure. First of all, we were probably the only ones in the sector providing liquidity. While there was not a lot of volume initially, we were definitely active and taking advantage of the environment. We were one of the few providers that existed in the market. We made a conscious decision to keep the loan size small and not use our capital on bigger loans, so that was my choice. We had decided that we were going to lend approximately $100 million to $150 million a month. We wanted to address a lot of clients rather than just do one or two deals. So, that was by choice. Now that we have a tremendous handle on our liquidity and our liability structures, what we consider to be offensive capital, we're scaling up in terms of the loan size that we do and how much volume we can handle. So, we wouldn't be surprised if you see some larger loans next quarter because we just have a different outlook going forward based on our capital, and our liability structures and where the market is and how we're performing.

Operator, Operator

And we will move next to Steven Laws with Raymond James. Your line is open.

Stephen Laws, Analyst

I echo the sentiment there. Congratulations on a nice quarter and a small list of people that increased the dividend in the second quarter. To follow up on Steve’s question, on the structured business, and maybe I think Paul you mentioned in your prepared remarks, seeing maybe new investments that lower returns includes stuff that’s paying off. Does that give LIBOR floor, and I'm a little surprised that spreads on new investments haven't widened where you're not facing that reinvestment risk there. But can you maybe expand on that a little bit, given the comment about lower returns on the new investments so those, that portfolio turns over?

Paul Elenio, CFO

Let me give a little color on that. I think the yield targets on our new investments are probably three percentage points higher than what we were originating to, but we definitely have the benefit in our system portfolios, a significant drop in LIBOR that is increasing the initial intended yields on those portfolios substantially. While we are doing extremely well on our new originations, we are not picking up the benefit of LIBOR floors to the same extent. Most of our loans have a 1% LIBOR floor that we are originating now. So, any drop in LIBOR, we won’t experience much of a benefit on what we were originating; we are already capturing that. So there is a little bit of differential, but the yield parameters on our new loans are very strong. But also keep in mind that our liability structures, which we have in place now, are extremely attractive and efficient, and we won't be able to obtain some of those efficiencies in the near term on the liability structures because that market is somewhat dislocated at least in the near term, but we're optimistic that as the market evens out we’ll have access to it soon, and then we’ll recapture some of that benefit.

Stephen Laws, Analyst

I appreciate the color on that, Paul. Thinking about the MSR margin, I think in your prepared remarks you highlighted the 269, you know, strength really driven by a change in the mix and I believe you said higher fees on the Fannie volume. Those look like they are going to be in place here near term and we're looking at a margin, maybe not 270 every quarter, but north of 200, or can you give us any outlook on where you see that going? Maybe has the mix changed since quarter end? Or how do you see that number for the balance of the year?

Paul Elenio, CFO

It definitely had a lot to do with the mix but also due to the servicing fees we're seeing on the new Fannie business. A little color, in the second quarter, the mix of committed loans, because that's how we calculate the MSR rate, was 90% Fannie loans. In the first quarter, 50% of the committed loans were Fannie loans. It’s just was a different mix. We think the mix will be more Fannie going forward. I don't know that it'll be 90%, but it'll certainly be a higher percentage. That will drive a higher MSR rate. The servicing fees we're seeing on new products are substantially higher than the servicing fees we were seeing a couple of quarters ago. We do think that outlook continues, at least for the next several quarters. It will depend on where rates go and where spreads go, but right now, we're seeing really high servicing fees in that business and we're seeing more of that volume, so we do think that maybe it's not 270 every quarter or 269, but it should be meaningfully above last quarter's number.

Operator, Operator

And we will take our next question from Rick Shane with JPMorgan. Your line is open.

Rick Shane, Analyst

A little bit about the execution on the private label securitization and the implications going forward. Good to get a transaction done in this environment. I'm curious where that execution round up in the current tape versus what you might have expected when you were originating those loans for sale, you would target on a go-forward basis. The second question is it looks like you guys been horizontal strip from a transaction, I want to make sure I understand where that is on the balance sheet. Because when we look at the structured products balance sheet, excuse me, we look at the balance sheet there was a modest increase in investments held or securities held to maturity. But I just want to make sure that what's the difference.

Ivan Kaufman, CEO

Yes, I will handle the first part. Yes, this was the first private label that was issued in the market. It was, as far as my knowledge, the first multi-family only securitization. It was a little bit of a new animal. It was extremely well received being a new issuer and doing it a little bit differently. We were surprised at the level of demand that we had. I think it was pretty much in line with what we thought, but the reception and the appetite for securitization like this were very, very strong. With respect to the financial issue, Paul, you want to walk through them?

Paul Elenio, CFO

Yes, so Rick, you're right. We did retain the bottom tranche as is required to do. It was about a $63 million face, and it's on the balance sheet at a fair value around $37 million, and that's sitting in investments in equity affiliates, I'm sorry, sitting in securities held to maturity. As we own that product for the next nine and a half years, it's a fixed-rate product, for which we will clip our servicing coupon on the full stack, and we will get a yield on that investment. Assuming we get most of all of that principal collected back by the end of its life, the yield on that investment could be anywhere from 10% to 12% on an unlevered basis, but it's sitting in the securities held to maturity line on the balance sheet.

Ivan Kaufman, CEO

What I was picking up is the discount at face value. So, the way we should think about that, in terms of contributing, is unmixed coupon—equally importantly appreciate that discount.

Paul Elenio, CFO

Let me just give you one more aspect of color on the product because this product was developed when there was some uncertainty about the longevity of the agencies. We felt it would be an outstanding hedge if we could create the ability to securitize multifamilies in the event that there was some level of cutback with the agencies. So we accomplished our goal of being able to do a securitization and be well received. We do believe if there is ever a cutback in the agency's volume, or mandate, that this would be a very viable product line and give us a huge strategic advantage in the marketplace.

Rick Shane, Analyst

It's a good proof of concept. I am curious in the current environment, do you continue - do you plan to continue to originate the levels you were sort of in the last year in anticipation, or—talk previously about doing maturities transactions at the year; is that still part of '21?

Ivan Kaufman, CEO

I think at this juncture, we've slowed that only push our agency volume is so active, and that's a less active aspect of our business, and the agencies are really dominating the market. So we don't really need to push that button to the same level, but we will continue to originate just at a slower pace.

Operator, Operator

And we'll take our next question from Jade Romani with KBW. Your line is open.

Ryan Tomasello, Analyst

This is Ryan on for Jade. Just regarding the servicing portfolio, do you have any data on the percentage of tenants that are benefiting from an insurance just considering the uncertainty facing on the stimulus front? I'm curious to get your thoughts on what the impact of a decline or non-renewal of the extended unemployment insurance could be on multi-family in general in terms of credit performance.

Ivan Kaufman, CEO

So I’ll give you our macro outlook and how we've approached it. Clearly, in April and May, there was an enormous level of concern, and the CARES Act really mitigated a lot of that concern. We made an extremely diligent effort to be strong with our borrowers and keep our baseline low, almost close to zero. It's almost unimaginable where our forbearance numbers are for Fannie Mae; they could be the lowest in the industry. We think that if the CARES Act is not renewed to similar levels and people won't return to work, and the unemployment rate, there will be some stress. We're prepared for that stress because our baseline is zero. If there is some fallback on the rent side, it could be a tough fall, but we believe we have a lot of room, and you'll see a little bit of an increase. But the bars who put themselves in fairly good and strong positions realize that they’re going to have to seek some additional capital during this time as there may be a shortfall. One of the very key advantages of our servicing is that the agency originations are the primary source of liquidity aligned with most borrowers, which has historically been very responsive, and they have to keep their loans current, even if there is some fallback on the rent side. So I think we can manage through this, and we managed through it extremely effectively. We have such a low baseline that I think there is not a significant impact on our portfolio.

Ryan Tomasello, Analyst

And just to clarify your comments, I believe you said 0.4% forbearances in the Fannie book, and was it 6% in the Freddie book?

Ivan Kaufman, CEO

Yes.

Paul Elenio, CFO

6, okay, great, thanks for that color. And then in terms of the agency origination strength continues to be very strong. How confident are you in the sustainability of that going into the second half of the year? And do you have any data you can share on what percentage of your agency originations are driven by refi business?

Ivan Kaufman, CEO

Just to comment on the pipeline gives you a good outlook in terms of what it may look like going into the quarter. It continues to build on a day-by-day basis. A lot of business is refi-driven, and there is a lot out there. We think the refi business will continue. The purchase activity has been stalled to some degree as there’s been a mismatch between sellers and buyers. A lot of people wouldn’t say sitting on the sidelines, but sitting at home and not being active. We believe that disconnect between buyers and sellers will start to level out, leading to increased activity. With rates where they are, we're very optimistic that the refi business should continue, and if there's an increase in the purchase business, which we believe is beginning to occur, we're feeling very comfortable with the balance of the year.

Paul Elenio, CFO

I intend to give you some numbers. Ivan gave you all the commentary, but we did about 75% of the business in the second quarter, which we thought was 25% in the first quarter. So those are the numbers on the refi business.

Ryan Tomasello, Analyst

And just one last question on the balance sheet portfolio, it looks like you had an additional NPL on the hotel side, as well as in a retail loan, any color there on those particular assets? And then with the provisions taken in the quarter, both on the balance sheet book and structured book, were those driven by general reserves or were any of those asset-specific? Thanks.

Paul Elenio, CFO

The two NPLs we had during the quarter you mentioned—one was a New York City hotel that we took a substantial reserve against in the first quarter. The other was a very small retail product that we also took a reserve against. We think we're more than adequately reserved on those assets, and it was somewhat expected that’s where we would land on those loans. Regarding the reserves for the quarter, we did take about $15 million in total, which was about $2 million on the agency book, and about $12.5 million to $13 million on the balance sheet book, the majority of which was just general CECL reserves. We took our share of what we call specific reserves back in the first quarter concerning the assets we believed were significantly affected by the pandemic, as Ivan mentioned in his commentary. We haven't seen any material change in the reserves on those assets at all.

Operator, Operator

We will take our next question from George Bahamas with Deutsche Bank. Your line is open.

George Bahamas, Analyst

Similar questions to some of the ones that were just asked and, you know, since you've addressed those, I was wondering how underwriting has changed in this environment versus what it looked like before, and just given maybe the effects of government assistance today. Any thoughts on how underwriting has changed, as we-

Ivan Kaufman, CEO

So I believe the loans we're putting on now could be the best loans we've ever put on in the history of the firm. I think there is a lot of structure in the loans. For the agencies, they've implemented interest reserves anywhere from six months to 18 months for principal and interest, and often taxes, giving you an enormous cushion that you never had before. In the past in the up market, with annual rent growth of 3% to 5%, you had to underwrite that and keep expecting that was going to occur. I think if you go back to my previous scripts over the last 18 months, we had a tremendous amount of caution during that period. When we're underwriting loans today, not only do we have those reserves, but we're underwriting to flat rent growth in a different environment. We proceed with much caution, typically with lower loan-to-values with interest reserves and conservative underwriting.

Operator, Operator

And we’ll take our next question from Lee Cooperman with Omega Family Office. Your line is open.

Lee Cooperman, Investor

Congratulations, you guys have done a terrific job in a very, very difficult environment. I want to focus a little bit on earning power and explain to me what the significance is of the $450 million of your liquidity position you focus on. It seems to me that in an environment you should get larger spreads? We just reported core earnings of $0.46 and we have plenty of liquidity. What additional earning power do you think you could generate if you put that liquidity to work in this environment?

Ivan Kaufman, CEO

Paul, you want to start and then I'll finish?

Paul Elenio, CFO

Sure, Lee. Yes, so we have produced an impressive number in the second quarter of $0.46. We talked about the earnings power from the residential business and how we think that will continue over the next several quarters. We do have $450 million of liquidity, as you cited. We believe some of that is offensive capital. The level of returns we've been generating, as Ivan said, the yields are down a little bit because of where LIBOR is and the LIBOR floors, but we're getting big benefits on the debt side. In the second quarter, from the $300 million of loans we originated, we generated a 15% leveraged return on those assets. We have not seen those kinds of leveraged returns in several quarters. With the equity we have, we want to deploy into those structured loans that can generate low to mid-teens returns consistently. Ivan, would you agree with that?

Ivan Kaufman, CEO

Yes, I think mid-teens return on our balance sheet portfolio is definitely something that we can originate to. Remember, it's not just the yield on those loans we put on our books; it's eventually creating an agency loan, which makes those yields exponential. So we’ll be very prudent with how we’re using that, mostly centered on multifamily, bridge loans, and those that convert into agency business. We believe we can continue to grow core earnings, and there's a lot of strength in our earnings and in our dividend, and we feel very good with where we are right now.

Operator, Operator

And I am showing that we have no further questions at this time. I'll turn the call back to Ivan Kaufman for closing remarks.

Ivan Kaufman, CEO

Okay, well, that concludes our remarks. We're truly pleased to be able to have this kind of performance in this environment in support of all our shareholders. It is remarkable that this is our ninth year in a row, as I mentioned in my script, of a dividend increase, and to be able to raise a dividend and raise your earnings in this kind of environment is an amazing feat. I want to compliment my management team and my Board of Directors for their support and look forward to concluding what I think is going to be an outstanding 2020. Have a great day everybody and stay healthy. Take care.

Operator, Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.