Good day, ladies and gentlemen and welcome to the Q3 2016 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your first speaker for today, Chief Financial Officer, Mr. Paul Elenio. Please go ahead.

Okay. Thank you. Good morning everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we will discuss the results for the quarter ended September 30, 2016. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform that you 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.

Thank you, Paul, and thanks to everyone for joining us on today’s call. We are extremely excited to be discussing our results and accomplishments for the first time as a new company, now that we have successfully completed the acquisitions of the agency platform. As we have discussed in the past, we believe this acquisition will be transformational to franchise future growth and success and we're very excited about the many benefits we will realized from this combination. As you can see from this morning's press release we had a very strong third quarter already realizing many of the benefits of this combination including immediate accretion to AFFO, adding significant diversification and predictability to our earnings streams and significantly increased our equity base and market cap. There were many other achievements during the third quarter as well, so we'd like to take the time for walk you through our significant accomplishments in our two distinct but complementary and cohesive business platforms. First I would like to discuss our agency origination and servicing platform. This platform is extremely important to our overall business strategy and outlook going forward as it allows us to transition the REIT from a mono line dependent entity into a fully integrated franchise with a significant origination business with high barriers to entry thereby providing a natural limitation on competition. We'll also enhanced our presence in the multifamily sector provide a strong foothold in the GSE portion in particular. As we've expressed many times we find the multifamily sector to be an extremely attractive market due to its solid fundamentals, significant borrow demand and strong performance through all cycles. This agency business also produces significant recurrent, predictable earnings and longer duration assets and there is also less capital intensive and generate a high ROE than our current…

Okay. Thank you, Ivan. As Ivan mentioned, we are extremely pleased to have completed the acquisition of the agency business, which we believe will be transformational for our platform. As our press release this morning indicated, we had a very strong third quarter and have already started to realize many of the financial benefits of the combination. As a result AFFO was $50 million or $0.21 per share for the third quarter and $33.9 million or $0.59 per share for the nine months ended September 30. This is above our dividend to-date of $0.47 per share and we do believe we will have a strong fourth quarter from the agency business which should result in continued growth in our earnings and dividends going forward. We have provided a substantial amount of financial information regarding our two significant business platform as well as some key metrics and data to assist our shareholder and better understanding our performance in the agency business. The press release also include the detail reconciliation from GAAP net income to AFFO indicating the new adjustments from our agency business which include non-cash item such as mortgage servicing rights, amortization of mortgage servicing rights and amortization of intangible assets from the acquisition accounting. Our AFFO for the quarter and year to-date ended September 30, translated into return on common equity of 10.8% and 8.8% respectively. This is up from last quarter due to the higher ROE associated with the agency business which is less capital intensive and operates more on a self-funded basis. For the quarter we generated approximately $14 million of net income and approximately $6.8 million of AFFO from the agency business, a portion of the income from this business is subject to federal and state taxes inside of taxable REIT subsidiary. For the third quarter…

Thank you. [Operator Instructions] And our first question comes from the line of Steve DeLaney with JMP Securities. Your line is now open.

Thank you. Good morning, gentlemen and congrats on a good start for the combined company.

Thanks, Steve.

Ivan, I was wondering if you would mind commenting a little bit on your smaller balance agency multifamily approach? Could you talk a little bit about your platform and your source? How you source loans on the smaller loans maybe compared to company like Walker Dunlop that goes after larger loans and in that if you would talk about your technology platform? I have seen some ads in CMA about your ALEX system and just would be curious to hear some comments about organically how the business runs when you come in every day? Thank you.

Sure. I think that’s a good question. It speaks a lot about our franchise. Given my background in running residential businesses and being to develop and build processes, we focus initially when we are building our business on smaller loans. That was an area of the market that people were not focused on. So, it was little bit of a strategic approach to go where nobody else was. The problem is to do it efficiently and profitably was not an easy thing to do. So, we developed a lot of internal processes. We trained our originators in a specific way and a recent implementation we developed the ALEX system, which is the Arbor LoanExpress system to be able to take the origination all the way through closing on an automated basis which reduces our costs significantly. We think it reduces -- to date we still have room to improve. We save about 26 hours of -- 26 to 30 hours per loan originations and got our originations costs down significantly and we still have more room to grow. Just as importantly, many of our borrowers do multiple transactions. It’s very common for somebody to do 5, 10 transactions for most of the year. So to the extent that they were able to use this automated system while originators who allows them to handle more production and communicate more effectively and take on a bigger load, a lot of originators do not like to originate these small loans because they are very cumbersome. With the implementation of our ALEX program and the training of not only our originators and internal people but our borrowers just importantly, they are able to handle a greater number of transactions and not shy away from what would be smaller transactions when they can in fact think they can work on larger transactions. So that’s been a cornerstone for us in the way we built our company. And clearly from small transactions become large transactions, whether it would be the borrower growing or whether the borrower just had access to other transactions. So, our average loan balance actually continues to grow significantly even though we are a dominant force within the smaller loan business. We are the number one provider for Freddie Mac on small loans and Fannie Mae. I believe last year and it should be this year, we’ve done more loan units with Fannie and Freddie than any other lender. That’s a tremendous accomplishment, gives us tremendous footprint and a tremendous presence and gives us huge amount of repeat business. And what we found is, if somebody’s doing multiple transactions, they want to go back to us because of the consistency of the service and reliability of our communication and it’s a little less price sensitive but was service oriented.

That’s very helpful. Thank you, Ivan for that. We are seeing a lot about one caps. Citi actually, I saw something on Bloomberg two days ago that Citi’s actually saying that maybe the FHFA will raise the caps yet again. I guess that would be the third time for multifamily caps. Practically speaking, Ivan, given your focus on the smaller loans and some larger loans but do the caps have a practical limit on your ability to originate? How do you see the discussion or noise about the caps affecting ACM?

I think we are less affected by the cap because we focus on smaller loans which are excluded. We also focus on the affordability aspect of lending, so we’re less affected. But the caps could be a little bit of an issue if the market continues to grow. I think the agencies did get a bump this year. I think that some of our loan production is going to be pushed to next year because everybody’s bumped up. So, we’ll see a little flow into the first quarter of next year. I think if the market is larger in 2017 than it is in 2016 in order for the agencies to continue to hold the same mark than they have now, they will need a little bit of a bump up. So, at worst we will maintain the same level we did last year, plus the growth because a lot of what we do is outside of the cap. I’m not sure what the FHFA is going to do next year, but I think they will have to be cognizant of a larger market and see how they want to react accordingly. But it will have less impact on us than anybody else.

Appreciate it. Thank you for the comments this morning, Ivan.

Okay. Thank you.

[Operator Instructions] And we have a question coming from the line of Jade Rahmani with KBW. Your line is now open.

Thank you. Just a high level question, what are your thoughts about potential M&A in the space as a tool to grow the platform? Are you interested or they any potential opportunities to combine with other entities, private or public?

That’s a good question and I’m going to answer that in two ways. First, we will continue to see what other business operations we can start organically like our residential business, which has contributed significantly in other lines of business. And we are always keen to do that given our entrepreneurial nature. We do have a history of having acquisitions to grow various businesses. I think that’s something we will evaluate very, very carefully and looked to use our currency and/or cash to expand our businesses. We think that valuations to different businesses over the last 36 months have been extremely high. We were fortunate to have a related party transaction, which have a lot of economies to it to be able to pull off that transaction. I think if the market has a little dislocation, we will be uniquely positioned to be able to do that. Make no mistake about it. We are specifically focused in the multifamily sector, all parts of the capital structure, all forms of origination and we will do what we can to find complementary businesses within that space to continue to grow that space but we will also look at other opportunities outside of that. So, it is certainly a key management discussion here and we will be well positioned if there is some dislocation.

I was wondering if you comment on the crowdfunding initiative that I think is through a separate vehicle. Is there any potential affiliation or joint venture, some kind of arrangement that ABR could have with that?

So, ABR will be a big beneficiary of that. It has to be kept as a separate unrelated entity due to certain requirements with the agencies. We have gotten tremendous amount of requests from many of our repeat sponsors if they could access that kind of funding and to some of their deals. And that is something that we feel could provide additional new sponsors to come in as well as enhance our relationships. So, we feel that ABR will be a real beneficiary of that product line.

In terms of borrower demand, seems like the GSE business is still very strong but overall, what are you seeing right? Are you seeing any diminution transaction volumes lost somewhat modestly? And also I was wondering if you could comment on your level of visibility at this point into deals that may close early in first quarter 2017?

I think from the prepared remarks, we were very clear that our fourth quarter is very strong and we are going to finish the year strong. Our pipeline is strong. Our presence in brand and the market is getting stronger. We are the number one lender for small balance loans far and above anybody else. And I think we continue to grow our market share and grab a bigger part of the market. We believe 2017 should be as good if not better than 2016, because of all the loans on the CMBS properties that were up for the loan. I think 2017 could be the biggest refinance year market. If interest rates remain in this region, I think our acquisition activity will remain strong. So, we are very optimistic for 2017.

Can you just clarify what your average of loan size is in the agency business?

Sure. Ivan, you want me to take that? So, currently for the quarter we had an average loan size as Ivan said has been moving up. So if you look at our portfolio of $12.6 billion, we have roughly 2,700 loans so that translates to an average loan size in the low five. And it was probably around there in the third quarter, which is probably in the low sixes in the third quarter. But as Ivan mentioned on the Fannie Mae side of the business, our average loan size has started to creep up and I think of late, Ivan, correct me if I’m wrong, our average loan size on the Fannie side has crept up to about $8 million. Generally, we are in the $5 million to $6 million range although lately we have seen some larger loans opportunities and our average loan size has started to creep up.

And just finally in terms of credit, are you seeing any changes sequentially that could suggest a deterioration, I think that’s one of the market fears about the series cycle right now?

Well, clearly, we’ve had almost 24 quarters of rent growth in our multifamily properties which is unprecedented. We are very cautious in terms of how we are looking at future rent growth and future occupancies. So, we’ve taken a more conservative posture in the market than some other lenders and backed up our own credit underwriting standards. There were certain markets that were oil patch related where about two years ago we started, just our credit philosophy. The fundamentals for renters and new housing starts specifically still work in favor of good occupancy and solid rents stabilized markets. But we are cautious about rent growth.

Thanks for taking the questions.

[Operator Instructions] And at this time I’m showing no further questions. So with that said, I’d like to turn the conference back over to CEO, Ivan Kaufman for any further remarks.

If there are no more questions, I’d just like to thank everybody for their participation. This has been a fantastic quarter and we are looking forward to a very successful fourth quarter and year-end. Everybody enjoy the news of the day and we look forward to our next call. Thank you.

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