Arbor Realty Trust - Earnings Call - Q2 2020

Transcript

Operator (participant)

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 speaker's presentation, there will be a question-and-answer session. To ask a question during this period, you will need to press the star one on your telephone. If you want to remove yourself from the queue, please press the pound key. Please be advised that today's conference is being recorded. If you need operator assistance, please press star zero. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please begin, sir.

Paul Elenio (Executive VP and 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 30th, 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 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 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.

Ivan Kaufman (Chairman, President, and 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 all realize the difficulties and complexities that our country and the entire world continues to deal with from the effects of COVID. In addition, as we all know, we have entered a recessionary period. After experiencing a 10-year run of tremendous economic growth, we as operators of this company were well prepared for the recessionary environment. We built a viable operating platform focusing on the right asset class with very stable liability structures.

Yeah. Strong liquidity, an active balance sheet and GSE agency business, and 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, 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 have developed. We had an outstanding second quarter with many significant achievements, including remarkable operating results, which has 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 are experiencing in our core earnings this year has already exceeded last year's pace. We realize significant benefits from our LIBOR floors, efficiencies in our CLO vehicles, increases in our servicing fees and GSE agency volumes, substantial income from our residential business, and reductions in our 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. Our 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, if applied to our current dividend, would result in a stock price of approximately $15.50 a share, and 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% from our originations 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 a premium value as it requires limited capital and 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 the current market conditions, but also gives us offensive capital to take advantage of accretive lending opportunities. We have been very successful in increasing our liquidity position, growing it 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 investor relationships.

And 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 the appropriate. By June 30th, our balance sheet was $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 are secured by $1.2 billion of assets with 8 different banks that we have long-standing relationships with. Additionally, the majority of loans being financed in these bank lines are also rated and CLO-eligible. With respect to our balance sheet portfolio, it's very important to highlight that over 90% of our book are senior bridge loans.

And most importantly, approximately 80% of our portfolio is in multifamily assets, which has been the most resilient asset class in all cycles and, we believe, will 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 and/or replenishment obligations by our borrowers, giving 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. 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 do not feel at this point that any material further impairments will be necessary, which gives us a 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 selections. 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, as we had 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 required to advance principal and interest payments for a period of up to four months, we advance only $700,000 cumulatively to date, which also has not materially changed since last quarter, and as a reminder, we have a $50 million advance facility from our larger banks at a 100% advance rate. Therefore, any further potential advance requirements will not be an issue for us. 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.

We believe this puts us in a class by ourselves that, at these extremely low levels, will provide a tremendous long-term return. And 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 (Executive VP and CFO)

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, tax-effected one-time swap losses related to 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 and 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-$10 million annually, or $0.06-$0.07 a share. This demonstrates the value of our operating platform, streams, and more importantly, gives us great confidence in our ability to continue to generate strong core earnings and dividends. Our adjusted book is $9.40 a share, adding back $80 million of non-cash CECL reserves on a tax-effected basis.

And 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 originations and $1.3 billion in loan sales. The margins on our second quarter GSE agency loan sales was 1.46%, including miscellaneous fees, compared to 1.49% for the first quarter. As Ivan mentioned, we closed our first Arbor 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 loan sales. We also have a robust pipeline, and we expect to produce strong origination buyers 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 30th, 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 of 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 was $3 million for the second quarter, compared to $5 million for the first quarter. In our balance sheet lending operation, 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 30th, compared to 6.35% at March 31st, mainly due to higher rates on runoff as compared to new originations and from a reduction in LIBOR during the quarter, which was largely offset by LIBOR floors on a majority of our portfolio. The average balance in our core investments was up 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 compared to originations and from a reduction in LIBOR in the second quarter. Total debt on our core assets was approximately $4.5 billion at June 30th, with an all-in debt cost of compared to a debt cost of around 3.68% at March 31st due to a sharp reduction in LIBOR in the second quarter. The average balance on our debt facilities was up to approximately $4.5 billion for the second quarter from $4.25 billion for the first quarter, mostly due to the senior unsecured notes we issued late in the first quarter.

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. Our leverage was also up significantly from 2.67% at March 31st, again, mainly due to the positive effects of LIBOR floors on our portfolio. Approximately 80% of our balance sheet portfolio have LIBOR floors between 1%-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.

The average leverage ratio on our perpetual preferred stock as equity was up to 87% in the second quarter due to the timing of our new overall debt to equity ratio. On a spot basis, it was down to 3.1 to 1 at June 30th from 3.3 to 1 at March 31st, excluding CECL reserves due to the efficiencies in our CLO vehicle secured 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 a 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-effected basis to our core earnings for the second quarter. We do believe that this investment will continue to contribute meaningfully to our core earnings going forward.

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. Back to the operator to take any questions you may have at this time. Operator.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one on your telephone keypad. To withdraw your question, press the pound key. We do ask that you please pick up your handset to allow optimal sound quality, and we'll take our first question today from Steve Delaney with JMP Securities. Your line is open.

Steven Delaney (Analyst)

Thanks. Hey, and congratulations, guys, on a great quarter amidst this sea of uncertainty that we're facing. I'd like to, Paul, you closed with the Resi business, and I'd like to start there. Obviously, a big part of the earnings beat in the quarter. I was just wondering, Ivan, 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 so that their contribution for your, I think, 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.

Ivan Kaufman (Chairman, President, and CEO)

Sure. First of all, it's a business, as you know. I have a tremendous history, and that's how I started my career very successfully. We invested in this business a number of years back with the idea as a really good hedge against some of our other aspects of our business. And as you know, when rates go down, typically that business goes up, and it's a real good offset to the interest earnings on our escrow balances. And that's how we viewed it. Clearly, with a drop in these interest rates, we built that company to have real great capacity. And with that automation and technology, scale up without a lot of overhead. And clearly, with the increase, now margins increased. But we're very confident that that runway is very positive for the next for quite a bit of time, given the interest rate cycle.

Steven Delaney (Analyst)

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

Ivan Kaufman (Chairman, President, and CEO)

Based on the name of Cardinal.

Steven Delaney (Analyst)

Cardinal.

Ivan Kaufman (Chairman, President, and CEO)

Yes.

Steven Delaney (Analyst)

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

Ivan Kaufman (Chairman, President, and CEO)

Sure. First off, we were probably the only ones in the sector providing liquidity. So while there was not a lot of volume initially, we were definitely active and taking advantage of the environment. So 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. We had decided that we were going to lend approximately 100-150 to address a lot of clients rather than just do one or two deals. So that was by choice. Now that we have a handle on our liquidity and our liability structures, and we have 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 I 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 faring.

Steven Delaney (Analyst)

Great. Well, thanks for the comments, and again, congratulations.

Ivan Kaufman (Chairman, President, and CEO)

Thanks.

Paul Elenio (Executive VP and CFO)

Thanks, Steve.

Operator (participant)

We will move next here to Stephen Laws with Raymond James. Your line is open.

Stephen Laws (Managing Director)

Good morning. Yeah, I echo the sentiment there. Congratulations on a nice quarter, and I think you'll be in a small list of people that increased the dividend in the second quarter. To follow up on Steve's questions on the structured business and maybe prepared remarks, but seeing maybe new investments at lower returns and some stuff that's paying off, does that do the LIBOR floors? 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 as that portfolio turns over?

Ivan Kaufman (Chairman, President, and CEO)

Yeah. So let me give you a little color on that. I think the yield targets on our new investments are probably points higher than what we were originating to. But we definitely had the benefit in our existing portfolio of a significant drop in LIBOR and increasing the initial intended yields on those portfolios substantially. But we are doing extremely well on our new originations, but we're not picking up the benefit of LIBOR floors to the same extent. Most of our loans have a 1% LIBOR floor that we're originating now. So any drop in LIBOR, we won't experience much of a benefit on what we're originating. We're already capturing that. So there is a little bit of a differential, but the yield parameters on our new loans are very strong.

But also keep in mind that our liability structures, which were in place and are in place, are extremely attractive, extremely efficient. And we won't be able to obtain some of those efficiencies in the near term on the liability structures because that market's somewhat dislocated, at least in the near term. But we're optimistic that as the market evens out and we have access to it soon, that we'll recapture some of that benefit. So the financing of those assets is a little more expensive. The yields are strong, but they don't have the benefit of the prior liability structures and the LIBOR floors, but it's still a very attractive environment.

Steven Delaney (Analyst)

Great. And I appreciate the color on that, Paul. And thinking about the MSR margin, in your prepared remarks, you highlighted the 269 strength really driven by a change in mix. And I believe you said a higher fee on the Fannie volume. Do those look like shifts that 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 kind of can you give us any outlook on where you see that going? Maybe has mix changed since quarter end, or how do you see that number for the balance of the year?

Paul Elenio (Executive VP and CFO)

Sure. So 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. So a little color in the second quarter of the mix of committed loans, because that's how we calculate the MSR rate. 90% of the committed loans were Fannie loans. In the first quarter, 50% of the committed loans were Fannie loans. It just was a different mix. But 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. So that'll drive a higher MSR rate. And then also, servicing fees we're seeing on new product are substantially higher than the servicing fees we were seeing a couple of quarters ago. And we do think that outlook continues, at least for the next several quarters.

It'll 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, like you said, Steve, but it should be meaningfully above last quarter's number.

Steven Delaney (Analyst)

Great. Paul, Ivan, I appreciate the comments. Thank you.

Operator (participant)

We will take our next question from Rick Shane with J.P. Morgan. Your line is open.

Richard Shane (Managing Director and Senior Equity Research Analyst)

Hey, guys. Thanks for taking my questions this morning. A little bit about the execution on the private label securitization and the implications going forward. Obviously, good to get a transaction done in this environment. I'm curious where that execution wound up in the current state versus what you might have expected when you were originating those loans for sale and what you would target. The second question is, it looks like you guys retained the horizontal strip from the transaction. I want to make sure I understand where that is on the balance sheet because when we look at the structured product balance sheet, excuse me, when we look at the agency balance sheet, there was a modest increase in investments held or securities held to maturity. But I just want to make sure that that's what the differential is.

Ivan Kaufman (Chairman, President, and CEO)

Sure.

Paul Elenio (Executive VP and CFO)

Ivan, you want to handle the first part?

Ivan Kaufman (Chairman, President, and CEO)

Yeah, I'll handle the first part. This was the first Arbor private label that was issued in the market, and it was, to my knowledge, the first multifamily-only securitization. So it was a little bit of a new animal. It was extremely well-received, being a new issuer and doing a little bit differently. And we were surprised at the level of demand that we had. So I think it was pretty much in line with what we thought. But the reception and the appetite for a securitization like this is very, very well-received. With respect to the financial issues, Paul, you want to walk through them?

Paul Elenio (Executive VP and CFO)

Sure, so Rick, so you're right. We did retain the bottom tranche as is required to do so, 5%. It was about a $63 million face. It's on the balance sheet at a fair value of around $37 million. And that's sitting in investments in equity affiliates. I'm sorry, it's sitting in securities held to maturity. And obviously, as we own that product for the next nine and a half years, however long it's out there, it's a fixed-rate product that we will clip our servicing coupon on the full stack, and we will get a yield on that investment. And assuming we get most of all of that principal collected back by the end of the life, the yield on that investment could be anywhere from 10%-12% on an unlevered basis. But it's sitting in the securities held to maturity line on the balance sheet.

Richard Shane (Managing Director and Senior Equity Research Analyst)

I think we've got. Okay. What I wasn't picking up is the discount to face value. So the way we should think about that in terms of contributing to income is a mix of coupon on that, but equally importantly, appreciation of that discount.

Paul Elenio (Executive VP and CFO)

That's correct.

Richard Shane (Managing Director and Senior Equity Research Analyst)

Okay. Great.

Thank you guys very much.

Ivan Kaufman (Chairman, President, and CEO)

Yeah. Let me just give you one more aspect of color on the product because this product was developed when there was some uncertainty as to the longevity of the agencies. And we felt it would be an outstanding hedge if we can 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. And we do believe if there is ever a cutback in the agencies in volume or mandate, that this would be a very viable product line and give us a huge strategic advantage in the marketplace.

Richard Shane (Managing Director and Senior Equity Research Analyst)

Yeah. No, you're right. It's a good proof of concept. I am curious, in the current environment, do you plan to continue to originate at the levels you were sort of end of last year in anticipation? You talked previously about doing two of these transactions a year. Is that still part of the plan?

Ivan Kaufman (Chairman, President, and CEO)

I think at this juncture, we've slowed that only because 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.

Richard Shane (Managing Director and Senior Equity Research Analyst)

I appreciate the color. Thank you guys very much.

Paul Elenio (Executive VP and CFO)

Thanks, Rick.

Operator (participant)

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

Good morning, everyone. This is Ryan on for Jade. Just regarding the servicing portfolio, hey, Paul. Do you have any data on the percentage of tenants that are benefiting from unemployment insurance? Just considering the uncertainty we're facing on the stimulus front, I've been curious to get your thoughts. Or non-renewal of the extended unemployment insurance could be on multifamily in general in terms of credit performance?

Ivan Kaufman (Chairman, President, and 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. But we made an extremely diligent effort to be very 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. So we think that if the CARES Act is not renewed to similar levels and people don't return to work and the unemployment rate is a little bit higher, there'll be some stress. And we're prepared for that stress because our baseline is zero. So it could be a tough fall, but we believe we have a lot of room. I think you'll see a little bit of an increase.

But the borrowers have put themselves in fairly good and strong positions, and they realize too, as the equity owners of their properties, that they're going to have to seek some additional capital during these times if there's a shortfall. One of the very key advantages of our book and why borrowers are so responsive is that since agency originations is the primary source of liquidity and the livelihood of most borrowers, 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, manage through it extremely effectively. And we have such a low baseline that even if there is a little bump up, it will have not a significant impact on our portfolio.

Just to clarify your earlier comments, I believe you said Fannie Book, and was it 5% in the Freddie Book?

Yes.

Paul Elenio (Executive VP and CFO)

Six. Yeah.

Ivan Kaufman (Chairman, President, and CEO)

Six.

Six. 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 a refi business?

So just a comment on that. Our pipeline is at historic highs. So that gives you a good outlook in terms of where the third quarter is going to be looking. And it continues to build on a day-by-day basis. A lot of the business is refi-driven, and there's a lot out there. And we think the refi business will continue. The purchase activity has been stalled to some degree as there's some readjustment between sellers and buyers. And a lot of people were really, I wouldn't say sitting on the sidelines, sitting at home and not active. So I think that as that disconnect between buyers and sellers starts to level out and they see eye to eye, you'll see that activity pick up to some degree. But with rates where they are, we're very optimistic that the refi business should continue.

If there's an augmentation by the purchase business, which we believe will be beginning to occur, we're feeling very comfortable with the balance of the year.

Paul Elenio (Executive VP and CFO)

And, Ryan, just to give you some numbers, Ivan gave you all the commentary. We did 85% of the business in the second quarter was refi. 75% in the first quarter. So those are the numbers on the refi business.

Great. Thanks, Paul. And thanks, Ivan. 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.

Sure. So 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. So we're more than adequately reserved, we feel, on those assets. And it was kind of expected that that's where we'd be with those loans. As far as the reserves for the quarter, we did, I think, $15 million in total. It was about $2 million on the agency book, about $12.5-$13 million on the balance sheet book. And the majority of all of that was just general CECL reserves.

We took our share of what we call specific reserves back in the first quarter on the assets we thought were significantly affected by the pandemic, as Ivan had in his commentary, and we've not seen any material change in reserves on those assets at all.

Great. Thanks, guys.

Operator (participant)

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

George Bahamondes (Equity Research)

Hi. Good morning, everyone. Thanks for taking my question. Similar question to some of the ones that were just asked. Since you've addressed those, I was wondering, underwriting, how has that changed in this environment versus what it looked like before, just given maybe the tenants who are taking government assistance today? Just kind of any thoughts on just kind of how underwriting has changed as we maybe look to some dislocation as the impact of government assistance wears off on multifamily assets?

Ivan Kaufman (Chairman, President, and CEO)

So I believe the loans we're putting on now could be the best loans we ever put on in the history of the firm. I think there's 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. So you have an enormous cushion that you never had before. In the past, in an upmarket, a 10-year upmarket, you had rent growth of 3%-5% annually. You had to underwrite that and keep expecting that was going to occur. And I think if you go back to my transcripts over the last 18 months, we had a tremendous amount of caution in that period. And I believe those last loans in expecting rent growth were probably ones that you needed to have a lot of caution.

When we're underwriting loans today, not only do we have those reserves, but you're underwriting to a flat rent growth and a different environment, and you can proceed with a lot of caution, so I think the environment's very strong, but you go mark-to-market, and you proceed with a lot of discipline, but I do believe that for the time being, we can proceed in a very conservative way, probably lower loan-to-values with interest reserves and conservative underwriting.

George Bahamondes (Equity Research)

Great. That's helpful. Thank you, Ivan, and that's it for me today.

Paul Elenio (Executive VP and CFO)

Thanks, George.

Operator (participant)

We will take our next question from Lee Cooperman with Omega Family Office. Your line is open.

Leon Cooperman (Chairman and CEO)

Thank you. 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 we're 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 it could generate if you put that liquidity to work in this environment?

Paul Elenio (Executive VP and CFO)

Ivan, do you want to talk?

Ivan Kaufman (Chairman, President, and CEO)

We'll both take it. Why don't you start, and then I'll go?

Paul Elenio (Executive VP and CFO)

Sure. So Lee, yeah. So we have put up a tremendous number in the second quarter of $0.46. We talked about the earnings power from the residential business we have and how we think that will continue over the next several quarters. We do have $450 million of liquidity, as you cited. We do think some of that is offensive capital. And the levered 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. And in the second quarter, the $300 million of loans we originated, we generated a 15% levered return on those assets. So we've not seen those kind of levered returns in several, several quarters.

So I do think with the equity we have that we want to deploy into those structured loans, we can generate a low to mid-teens return all day long on those assets. Ivan, would you agree with that?

Ivan Kaufman (Chairman, President, and CEO)

Yeah. I think mid-teens return on our balance sheet portfolio is definitely something that we can originate to. And as you know, 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 use that, mostly on multifamily bridge loans and mostly on multifamily bridge loans that convert into agency business. So we think we can continue to grow our Core Earnings. And there's a lot of strength in our earnings and our dividend. And we feel very good with where we are right now.

Leon Cooperman (Chairman and CEO)

Congratulations. You've done a great job in positioning the company. I compliment you.

Ivan Kaufman (Chairman, President, and CEO)

Thank you, Lee.

Paul Elenio (Executive VP and CFO)

Thank you, Lee. Thank you for your support.

Operator (participant)

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 (Chairman, President, and CEO)

Okay. Well, that concludes our remarks. And we're truly pleased to be able to have this kind of performance in this environment in support of all our shareholders. And it is remarkable that this is our ninth year in a row, as I mentioned in my script, of a dividend increase. And in this kind of environment, to be able to raise your dividend and raise your earnings is an amazing feat. And I want to compliment my management team, my board of directors for their support. And I 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 (participant)

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