Ladies and gentlemen, thank you for standing by. And welcome to the Third Quarter Arbor Realty Trust Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be adviced that today’s c conference is being recorded [Operator Instructions]. I would now like to turn the call over to your speaker today, Paul Elenio. Please begin, sir.

Okay, thank you, Norma, 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 September 30, 2019. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor’s expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today, or the occurrences of unanticipated events. I’ll now turn the call over to Arbor’s President and CEO, Ivan Kaufman.

Thank you, Paul. And thanks to everyone for joining us on today’s call. As you can see from this morning's press release, we had another outstanding quarter, which continues to demonstrate the diversity of our operating platform and the value of our franchise. We are very pleased with the continued growth in our business, which has consistently increased our baseline of predictable and stable earnings, allowing us to once again increase our quarterly dividend to $0.30 a share, which represents our third increase this year and reflecting the annual run rate of $1.20 per share, up from $1.08 per share. Additionally, the significant growth we experienced this year continues to increase our run rate of core earnings, making us very confident in our ability to comfortably maintain our current dividend as well as grow it in the future. Over the last few years, we have clearly outperformed our peers, delivering consistent annual shareholder returns of approximately 30%. And this performance, combined with the quality and diversity of our income streams along with the consistency of our earnings and our low dividend payout ratio, clearly differentiates us, which is why we believe we should consistently trade at a lower dividend yield and a substantial premium to our peer group. To highlight our success further, I would like to talk about the growth we experienced in both of our business platforms. In our Agency Business, we grew our servicing portfolio another 3% in the second quarter and 12% over last year, and is now at $20 billion. This portfolio generates a servicing fee of 44 basis points and has an average remaining life of over nine years, which reflects an 11% increase in duration over the last two years. And as a result, we have created a very significant predictable annuity of…

Okay, thank you, Ivan. As our press release this morning indicated, we had a very strong third quarter, generating AFFO of $42.4 million or $0.36 per share. These results reflect an annualized return on average common equity of 15%, which continues to demonstrate the earnings power of our capital light agency business, as well as the significant growth and cost efficiencies we are experiencing as we continue to scale our balance sheet portfolio. And as Ivan mentioned, we are very pleased with our ability to once again increase our quarterly dividend to $0.30 a share, reflecting an 11% increase from a year ago and remain confident in our ability to comfortably maintain our current dividend, as well as grow it in the future. Looking at the results from our agency business, we generated $29 million of pre-tax income in the third quarter on approximately $1.4 billion in originations and $1.5 billion in loans sales. The margin on our third quarter sales was 1.43%, including miscellaneous fees compared to 1.54% all-in margin on our second quarter sales. We also recorded $30 million of mortgage services rights income related to $1.5 billion of committed of loans during the third quarter, representing an average MSR rate of around 2.02% compared to 1.44% rate for the second quarter, mostly due to some large deals that we closed in the second quarter, which generally have our servicing fee. Our servicing portfolio grew another 3% during the quarter to $20 billion at September, with a weighted average servicing fee of 43.5 basis points and estimated remaining life of 9.2 years. This portfolio will continue to generate a predictable annuity of income going forward, around $87 million gross annually, which is up approximately $5 million on an annual basis from the same time last year. Additionally, early…

Thank you [Operator Instructions]. Our first question comes from Steve Delaney of JMP Securities. Your line is open.

The gain on sale margin little over 2% in the third quarter, you mentioned that you had a mega deal or large deal in the second quarter. Paul, how do you feel about that as a run rate? And obviously, I know the Fannie Mae component, which was up to 77%, that’s a factor in there, but is 2% reasonable, given your mix of business, a reasonable level for us to project on the MSR gain?

I think you said gain on sale, but I think you meant MSR rate. So, the MSR rate was 2.02 for the quarter, and it was higher than it was last quarter for the reasons you mentioned. We did have some larger loans that we closed in second quarter with lower servicing fees. We didn’t have that kind of mix in the third quarter. It also depends on, as you mentioned the mix of Fannie Mae versus the other products, and it’s a little heavier towards Fannie Mae. So it’s a tough one to project. But I would say that it should trend on the higher end, maybe not 2% every quarter, but it should trend on the higher end that it has over the last few quarters, because the Fannie Mae business has picked up with the new cap and the new developments there. And the servicing fees are staying relatively high in that business, so unless the mix significantly changes to Freddie than Fannie, which I don’t anticipate, we think that MSR rate could be high going forward.

And you smoked me out on the -- I was interested in the servicing revenue going up 10% with the volume only up, the UPB up 3% and you mentioned yield maintenances. As you attribute that, do you consider what you saw kind of routine or was it the drop in the 10 year from 250 early in the year to 170. Did you think that there are people actually that are bailing out early and refi’ing their GSE loans?

I'll let Ivan talk about the market. But I do think that it was a little surprising, and it probably had to do with the interest rates. The prepayment fees were trending more, in my opinion, normalized over the last, because it got down to $3.5 million last quarter. That’s where I kind of pegged that I thought it would be this quarter and maybe next quarter, but it came in a little higher than I expected. And I think I would attribute that probably to, as you mentioned, Steve, the drop in the interest rates and people refinancing their portfolio, but we’ll get Ivan’s view on where he thinks the market is from that perspective.

I think it’s not just the product of refinancing. I think when the rates do drop, there may be an acceleration of some sale activities, and people are willing to deal with the yield maintenance issues, because their gain on sale and their own assets are more robust. So, it’s definitely a factor and it’s a consistent factor for us in our earnings. And sometimes, it's higher, sometimes it's lower, but it’s always within a certain range.

Thank you. Our next question comes from Stephen Laws of Raymond James. Your line is open.

I want to follow up on a couple of things from, Ivan, in your prepared remarks on the private label side, $81 million of originations in Q3. What should we think about, is it a normal quarter on the private label business? And then to that point, what’s the difference in underwriting standard that the loans you'll do there on the private label securitizations yields versus the agency yields, or maybe a little bit of the characteristics that distinguish the two?

I think, first off, the private label was created as a result of the agencies, at least our anticipation that the agencies would be cutting back because they were hitting against their cap and that's how we created the program. So, it was filling an absolute void where the agencies were not quoting, they were backing up their pricing very, very steep and the private label was actually inside of the agency pricing. So, the amount of private label we produce will be a product of how aggressive the agencies will be or will not be and that's the real primary issue. The secondary issue will be is if they are not fulfilling their mandate on the mission-driven business, which is 37.5%, they'll be more aggressive on the mission driven business and less aggressive on the non-mission basis. So, if they're less aggressive on a non-mission-driven business, we'll do more private-label business in general. Sometimes, the agencies have a concentration in a specific market, and they're less aggressive and that's a void to be filled as well. However, sometimes they have a sponsor concentration and that affects them as well. So, there are various number of factors that exist, but we would not expect the amount of private-label business we did in a short period of time to be operating at that level on a run rate unless the agencies shy back on their production. They are getting more aggressive now and I think they are taking more and more of the market. So, I would anticipate seeing lower run rate than what we have in the pipeline right now. What we have in the pipeline right now suggests it's probably about $2.5 billion securitization level to $3 billion for 2020. I'll expect that to be probably half.

Great, I appreciate the color there, and it does sound like a good opportunity to fill in when there are gaps in the market. And shifting to a follow up on your SFR comment, $100 million to date, and I know a lot of expenses have been going in building out the platform. How should we think about top line growth, really not the right way ti think about it, but ROEs associated with ramping that up and what type of ROE expansion or benefits to the bottom line as you leverage those costs that have been put in place building out that platform?

So, I think we've been able to absorb the cost in our operating numbers for 2019, and I believe that for 2020, we will continue to grow that business. My objective would be able to get to a run rate of both bridge lending and securitization of around $50 million a month on each side. At that level, if we can get there, it will be substantial contributor to our bottom line. But right now, it's not a drag. It's probably somewhat neutral turning to a positive as we now have loans on our balance sheet producing positive earnings.

And then thinking about the competition side. When you look at your competitors, do you see more pressure on spreads or on the credit side with underwriting standards? And maybe talk a little bit to each side of that as to how you are addressing that competition in the market?

Yes, there's constant pressure on spreads. On the balance sheet side, spreads have come in considerably. I would say they're in another 25 basis points to 35 basis points in last four months since our last quarterly call. However, we've been able to get a lot of economy scale on the borrowing side to offset that and maintain our spread, so that's been quite positive for us and grow our book at the same time. So we’re pretty comfortable with where we are. Although, our coupons are tighter, our borrowers have offset that to a large degree. On the agency side, it is a fiercely competitive market. And we’ve been able to maintain our volume levels, and not be ambitious about growing too much and being overly aggressively in what we do and wait up on our overhead. So we’ve been pretty disciplined about trying to manage our business accordingly and doing a good job. I think that market will continue to be competitive, but we have a good franchise and we have a good customer base. And we’ve been able to maintain our business plans fairly effectively.

Thank you [Operator Instructions]. And I’m currently showing no questions at this time. I’d like to turn the call back over to Mr. Ivan Kaufman for closing comments. Actually, I’m sorry I have question. Jade Rahmani with KBW, your line is open.

I was wondering if you would be interested in property management as an additional business line to add, it would seem complementary to the company's increasing focus on the residential market. We know that the single family rental space, there is definitely a need for institutional property management, because the scale requirements and economics in that business. And also I know you've made investments in technology, and technology has been a theme as well. So could you comment on that?

We’ve evaluated that in the past, and we’ve declined in going into that area for a number of reasons. It's very people intensive, requiring a lot of management and lot of infrastructure with the margins being very low. We’re also afraid of some of the headline risk that might come along with that, because property management and some of the negative things that can occur when you manage your properties, there is some headline risk from time to time, whether it's justified or not that we felt is probably not where we wanted to be as a public company and effect the rest of our businesses. The only real issue for us is whether the synergies from managing properties and creating financing opportunities will offset all that and create additional revenue streams, and we’re not sure it does. So we think there're better places to put our capital and management at the present time.

Turning to the overall commercial real estate business, it seems like you have a very positive view toward multifamily, as well as single family rental and lower risk dynamics in residential housing in general, particularly the affordable focus. What’s your view toward the rest of the commercial real estate market? And do you expect to continue to originate bridge loans and other property types, such as office or in equities?

So we probably have about 20% to 25% of our originations in portfolio and other asset classes. And we pick our spots, we’ll do some hospitality, some retail, some office certainly some healthcare. So we’re not major players in that area. We’re opportunistic for either servicing our borrowers or seeing a unique opportunity. But historically we love the multifamily market. It's been the best performer in and outside of all other markets that we’ve engaged in. So that will probably be the balance in our book.

And in the commercial real estate asset classes, you mentioned away from residential. Would you expect an uptick in market wide loan delinquencies next year?

Our feeling is that we're at a certain point of time in the cycle, there's a lot of liquidity, there're lot of new players, there's a lot of syndicated capital and lot of a new entrants into the market, and with that becomes a level of risk. And I think that what we'll do is proceed with a lot of caution with the sponsors we do business with and be very, very cautious in this point time in the cycle. So we do expect it'll be a little bit of the uptick in delinquencies in the industry, in general. And a lot will do with interest rates, as well as rent increases. So you've had a historical run of over 10 years of 3% to 5% rental increases, which is a very, very positive for the multifamily asset performance and a very attractive interest rate environment. Those are two variables that nobody can control right now but we're very conservative in the way we underwrite our loans or rent growth, as well as exit cap rates and exit interest rates on our loans. But that would be the period of time to be cautious.

And touching on the dividend, let's hope the decision to again raise the dividend just with the fact as you mentioned rates, spreads being an uncertainty. Why not chose instead to be more defensive in paying some additional capital?

Well, number one, we feel we are very conservative. We have a lot of room within our dividend. And our core earnings just continues to grow at tremendous levels. And I think what's worth noting is when our earnings grows our baseline grows, it doesn't go down. Our servicing revenues, our escrow balances, our balance sheet, it shows a tremendous baseline from the year-to-year. And we have that -- we're still at a very low payout ratio. We feel there is a lot of room and we are very comfortable with it. And it would almost be inappropriate for us to have a lower payout ratio with our core earnings growing at such a rapid rate.

Thank you. And our next question comes from Rick Shane of JPMorgan. Your line is open.

Ivan, I appreciate the commentary on the private-label in response to Steve's question. I want to talk about a little bit tactically. Obviously, it’s a business that's meant to sort of provide stability when there are fluctuations in the other parts of the market. But obviously, you can't just sort of be in and out of that based on where the thresholds are. I'm curious, it sounds like the plan is to run this on a study state basis. How do you look at the economics versus the agency business? How do you decided in periods where there is capacity on the agency side, whether or not to do private label loans?

I think what will happen is, depending on where the agencies are and how aggressive they are, both on pricing and in markets, I think our footprint will swing dramatically or grow in a nice way. There may be periods of time where we're just not an effective originator of that product, because the agencies are too aggressive. So currently, the pipeline we generated is significant and should lead to really, really good execution. I think now that the agencies are tightening up every week, there may not be space for us to originate that product in the market. So the market will dictate to a large degree with the agencies being the leader in the market for how much room there is. And the agencies continue week-by-week to tighten their spreads 3 basis points, 5, 10. They went from being 2.50 to 2.75 over and now they are actively quoting from 1.90 or 2.10 or 2.15, although, which is right around we’re quoting. And if they get inside of that then it won’t be sufficient enough product. But if they widen, it will be. So right now, it's kind of board line with the agencies probably and to dominate that market again. So, we’ll have to wait and see how it works.

And I'm not sure I heard if you answered this to Steve’s question or not. But how did the economics compare versus the agency business on a gain on sale basis?

So we think that its lie somewhere between the two agencies, between Fannie and Freddie, the economics. So the economics on the Fannie Mae business are stronger than on the Freddie Mac business, and we think that lies right in between.

So it probably will impact gain on sale margin at the margin?

Paul, what’s your feeling on that?

Yes, I think that’s right. I think it’ll depend on how, as Ivan laid out Rick, how active we are in that private label business. I think the economics, as Ivan laid out fall in between the two agencies obviously Fannie being more robust on the servicing fee side and on the gain on sale side than Freddie. So it just falls in between those two. It likely doesn’t move the margin in total significantly unless it's a bigger part of our book than the agencies regress. So it will be hard for me to tell you that it won’t affect the margin at all, but unless it’s a real big part of our business, and that means the agencies are reducing their footprint, I don’t think it moves the margin materially.

Yes, there are some factors on that. The larger deal you do there'll be fixed expenses and that has a big impact on the market we originally targeted doing that $350 million deal. We hope to come out somewhere between $600 million and $800 million, which will have a very positive impact on our margins, probably by at least quarter of percent in absorbing those fixed expenses. And the other item, which we don’t know how much of an impact it will have. We're trying to build a brand given the way we’re doing it. And we’re hoping we can trade -- we’re pricing it to trade comparable to the CMBS market. We think with our brand and our expertise in the securitization market us maintaining part of the BPs and being in the servicing side of the business, perhaps there can be some pricing advantage, which hasn’t been factored in. So it's little early to say exactly where we come out. But right now, it's looking very favorable.

Thank you [Operator Instructions]. And I’m currently showing no questions at this time. I would like to turn the call back over to Mr. Ivan Kaufman.

Thank you everybody for participating on today’s call. Sorry for the technical difficulty that occurred originally on the inception of the call. The third quarter was once again another outstanding quarter. And we’re optimistic to complete the rest of the year in a very positive way. Thank you again, take care everybody.

Ladies and gentlemen, this concludes today’s conference. You may now disconnect.