Good morning, ladies and gentlemen and welcome to the Third 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 question-and-answer session. [Operator Instructions] I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please begin, sir.

Okay. Thank you and 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 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 maybe 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 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 will 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 hope that you and your families are safe and healthy. We all realize the difficulties and complexities that our country and the entire world continue to deal with the effects of COVID and so we appreciate your participation during these challenging times. As we have discussed on our last few calls, we are very well positioned to succeed in the current economic climate. We have 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 and many diversified income streams that generate strong core earnings and dividends in every market cycle. We have also developed a business model that provides many diversified opportunities for growth, which clearly puts us in a class by ourselves and has allowed us to be a top performing commercial mortgage REIT in the space. We had another record quarter with our third quarter results reflecting the continued commitment and successful execution of our business strategy and a diverse platform we have developed. Our continued momentum and truly remarkable third quarter results have once again allowed us increase our dividend to $0.32 a share. This is our second consecutive quarterly dividend increase, reflecting a 7% increase so far this year and represents a payout ratio of around 70% compared to an industry average of 90% to 95%. As Paul will discuss in more detail, our core earnings for the third quarter was $0.50 per share, which is an incredible accomplishment and a true testament to the value of our franchise and the many diverse income streams we have created. We continue to realize significant benefits from many areas of our diverse platform, including substantial growth…

Thank you, Ivan. As our press release this morning indicated, we had another exceptional quarter producing core earnings of $67 million or $0.50 per share. These results have translated into record high ROEs of approximately 22% for the third quarter and 19% for the first 9 months of the year. As Ivan touched on, we continue to benefit from several positive aspects of our diverse business model, including significant growth in our agency platform, LIBOR flows in a large portion of our balance sheet loan book, substantial income from our residential banking joint venture and reductions in our overhead and general and administrative expenses and these benefits clearly demonstrate the value of our operating platform and the diversity of our income streams and more importantly gives us great confidence in our ability to continue to generate strong core earnings and dividends. As we mentioned earlier, we had another phenomenal quarter from our residential banking business as a result of the continued historic low interest rate environment. We recorded $32 million of pre-tax income from this investment in the third quarter, which contributed approximately $0.15 a share on a tax effective basis to our core earnings for the third quarter. 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. And we believe this investment will continue to contribute meaningfully to our core earnings going forward and we are expecting the fourth quarter results to be less than the last two quarters largely due to seasonal nature of the business. Our adjusted book value at September 30 was approximately $9.74, adding back roughly $70 million of non-cash general CECL reserves on a tax effective basis. This is up 3.5% from approximately $9.40…

Thank you. [Operator Instructions] And we will take our first question from Steve DeLaney with JMP Securities. Please go ahead. Your line is open.

Thank you. Well, good morning, gentlemen and once again congratulations on an excellent quarter. I think, I say that every quarter, but it’s you have made it hard not to.

Thanks.

I would like to start – sure, Ivan. I would like to start Paul with the gain on sale margin on the agency book 163 versus 132. I heard your comments and we know Fannie’s better than Freddie and FHA is better than anything. But I am looking at the table on the first page of the press release. I don’t – and I don’t see a big shift towards Fannie and FHA anything material. So, is there anything else little more subtle in that 163? I am looking at our model the last 2 years and 140, 150 something like that. 132 might have been lower than normal, but is 163 do you think that’s a sustainable level just a little more color about that, please, because it’s important number?

Sure, Steve. It’s Paul. So, one of the things I said in my commentary is you really have to compare the 163 to 146 from last quarter, because although we put up 132 last quarter, we had the private label securitization in there. So, if you back out the private label securitization, you are at 146 versus 163, still a meaningfully – a meaningful move as you mentioned from 146, which is around where we have been running to 163 this quarter. And you are right, there wasn’t really much of a shift in the Fannie, Freddie business, but it has to do with loan sales, not loan originations as you know. We book our gain-on-sale on loan sales. So, while there wasn’t really much of a move in FHA originations, which have been strong, there was a bigger move in FHA loan sales, because of the timing of when loans sell versus originate. So, we had significantly more FHA loan sales this quarter than last quarter, which carry a higher margin. And on the Fannie business, we did sell it just had a higher margin and maybe Ivan could comment a little bit on what’s going on in the market, but we did have some deals and it matters on the size of the deal. It matters – there is lot of different factors that go into the margin, but the margin has been very robust on the Fannie product as well.

That’s helpful color. Sure, Ivan.

Steve, I will just add a little bit color on that. I think we had a healthy margin. We probably had no super big loans, which generally carry a smaller margin and we might have been – have a little bit of benefit that during that initial dislocation period kind of in the summer – a little before the summer that we continue to operate very effectively. And perhaps we are in a better position than most and had a healthier pipeline and we had a little less competition in that period of time, just because many people were – and many other competitors were more like you are in headlight situation and it gave us an ability to get a little step ahead of everybody. But for my own purposes, our pipeline is extraordinarily strong, probably the highest it’s ever been. And as we have indicated in our comments, we are expecting an even stronger fourth quarter than what we have had. So I think we will be able to maintain the margins that we customarily have and hopefully we will be able to do a little bit better.

Okay, thank you. And Ivan, could you talk about a little bit about the refi dynamic for agency multifamily borrowers now we all know what is going on in residential single family, you see it at Cardinal we see it in these resi mortgage IPO’s that have come into market, and it’s just gangbusters. So, obviously, your loans have like lockouts and they have yield maintenance? Is there a scenario where you can work with borrowers and get them a lower coupon, refine a lower coupon and still collect some yield maintenance for yourself, so you end up with a win-win situation with your existing servicing book?

Sure. Well, there are a couple of components. First of all, FHA does have that product, and they do have a modification product, and you will see an uptick on that in general. And that will occur on the on a Fannie Mae loan book, if people do exit a little earlier, we do get a pick up on some of the yield maintenance and increases revenue going forward. So you would not see that as much on the Fannie book, as you do on the FHA book, and our FHA book is not that big. But on a Fannie Mae book, we saw a little bit last time, maybe Paul can comment on that. We haven’t seen that thought to occur yet, but it’s possible that there maybe a little bit of an uptick on that side.

Yes, so Steve, that’s right, Ivan is right. We have not really seen it big meaningful, yet. But some commentary, we had $490 million of runoff in the servicing portfolio we put on $1.5 billion in new originations. So, that’s really nice growth. Of the 490, we did recapture 40% of that runoff through new originations. And I think what’s meaningful as well is the balance sheet business continues to feed the agency business and that’s one of our key strategies and of the $206 million that ran off in the third quarter on the balance sheet book, we were able to recapture 65% of that through agency product. So it’s really feeding that servicing book very, very nicely. And one other point I think we should continue to emphasize is that, that servicing portfolio continues to grow at a healthy clip and it’s not just about the gain on sale that we are booking, which is significant. But it’s about that annuity and our servicing life is over 9 years at this point, mostly prepayment protected. And as Ivan said in his commentary and mine as well, it’s generating over $100 million gross annually in servicing fees. So, if we can continue to build that portfolio through our own originations through refing some of our balance sheet runoff and other runoff that other people have, we are going to continue to create a substantial annuity going forward.

Yes. Just a little color on that as well we are seeing longer duration product, so there were lot of 5-year loans of floating rate loans that were done over the last couple of years. Now we are seeing more of a shift to 10 and 12 years so duration of our income range is going to be even longer than it was historically and the mix is kind of 12-year product with a greater percentage.

Interesting. Yes, that will make sense given where the yield curve is. Well, listen, thank you both for the color and good job.

Thanks, Steve.

And we will take our next question from Jade Rahmani with KBW. Please go ahead.

Thank you very much. Can you comment on the credit performance? And if you are seeing any both pockets of resilience in the portfolio or any sectors of risk multifamily has been quite a puzzle this cycle. I think initially in the March-April timeframe, lot of people thought rent collections would decline, there would be move-outs to single-family and that would cause some credit issues in the multifamily space. So far we haven’t really seen that. We have seen some of the large apartment holders in dense or urban areas being impacted, but the overall space is proving very resilient. So, just wondering if you could comment on that?

Yes. I mean, clearly, the rent collections are remarkably amazing. They are only off slightly rather than significantly and the areas that are most vulnerable, of course, are the urban areas, specifically New York City and specifically market rate apartments in New York City and other areas like San Francisco, those are vulnerable areas. However, we haven’t seen it go through in terms of people making their payments as borrowers or making their payments as renters. I think we are all anxiously waiting to see what happens with the stimulus bill. I think the stimulus bill helped quite a bit. Initially, it’s gone away, everybody thought when it went away, there would be an impact, the impact we haven’t seen. However, if there is some softness in the market, I think the baseline of where we are as a firm we have a lot of room. I mean, even if things fall off a little bit, we have an extraordinary amount of room before our loans get impacted. So, we feel really comfortable specifically about portfolio on our balance sheet. We have a lot of structure in our loans, which really allows our loans to perform not just based on the assets, but based on the borrowers as well. So, we feel relatively comfortable. But I think if you are looking at stress points in the market, I would look at the Class A, I would look at the lease-up situations. And I would look in the urban areas where these Class A buildings and not being released and there are lot of concessions, we as a firm don’t have a lot of exposure to that and we feel fairly comfortable. But if I was in the market, that’s what I would be concerned about.

And why do you think that the Freddie forbearance rates have been much higher, you mentioned 6% versus Fannie at 0.4%?

So, they have different policies and a lot of the forbearances on the smaller loans. I do want to point out that we are on the lowest of the spectrum for both agencies. I think the forbearance numbers for Freddie is over 10, we are well below that. And specifically beings of small balance oriented. I think Freddie’s policies were a little bit more liberal and Fannie Mae’s policies were more, let’s see, if you need help, let’s see if you would be affected. And they gave us as a servicer of the ability to really make the evaluation as to whether the bars were affected and then apply good business judgment, whether they needed help or not, whereas Freddie was more, waving it in. I think they have altered that philosophy a little bit. And I think you are seeing a lot more forbearance on Freddie Mac’s more balanced business. And I think, once again, on the small balance business, we are as you know one of the leading originators in that space very active in that space, know how to manage it extremely well. So, even there, we are seeing probably half of the forbearances that the rest of the industry is saying.

Okay. And I think that the multifamily space has definitely experienced that of a refi wave, not as pronounced as in the single-family space where those mortgages aren’t prepayment protected. So there is a lot more volatility in single family, but generally, how do you think about the sustainability of the agency volumes right now? Is there any portion of this uptick that you expect to abate in coming quarters?

I think it’s going to be a very, very consistent origination scenario with these interest rates. You have to keep in mind that the nice part about the originations business we are in as loans are generally 5, 7 and 10-year loans and they run off accordingly and there is always a new wave of loans that are running off. So, as loans come out of their prepayment period, there is a whole new wave of loans that are eligible and at these interest rates, you can see a consistent level of production. The key is going to be are the assets performing, because generally the refinance loans you need for the agencies 90%, occupancy – economic occupancy. So, the pandemic if it continues and if there is some softness in some of the areas may impact the ability to refinance some of the loans, but that’s specifically more geared towards the urban areas like New York and San Francisco and other metro areas that are suffering from people not moving in, but we expect it to be a continued flow and we expect business to be very, very active all the way through 2021 and forward.

Thank you very much. Do you want to touch on the single family rental initiative? I know that’s been the space you have been actively investing in and seems that the Arbor platform, particularly on the technology side, could be useful in procuring some of that business, because I know some lenders have struggled to get scale in that space and seems something that would really play and see Arbor’s wheelhouse here?

Yes, we love that space as we have previously indicated. There are a couple of aspects in that space. The one space that we think we are going to be the leading provider of financing and is the build-to-rent communities, I think we have close to 10 projects under application, which would probably put us as the number one lender in that space. And we are developing a huge reputation. So there is a construction component throughout which we are well equipped for both on a technology and a process side. And then once those loans become those projects become, they will be under putting a bridge on it. And then after the bridge, we end up putting a permanent loan on it, hopefully through the agencies if they qualify. So we love that business, we are putting a lot of effort a lot of technology is into that space. The other side of the business is providing financing for people buying scattered sites. And that is a very active part of our business. And we expect that to grow. So we would dedicate a lot of time to it, a lot of energy and a lot of technology. And I think we are going to really see the benefit in the end, maybe in the fourth quarter of this year. That is certainly going to carry through very strongly into next year.

Thanks for taking the questions.

Thank you, Jade.

We will move next with Stephen Laws with Raymond James. Please go ahead. Your line is open.

Hi, good morning. Ivan, you commented on the strong volumes you expect to continue in Q4, is this one $1.4 billion, $1.5 billion a quarter a good run rate or how do you – what kind of visibility do you have into this moving into 2021 and any seasonality we should think about around the volume?

So, I think Paul gave a little comment about how volume we are up around 11% year to date. And he expects us to be approximately 20% and maybe as much as 30% for the year. So that indicates you that we are going to have even a stronger fourth quarter. And our numbers should be much stronger you could do the math and understand that our line is going to be very, very strong to get the overall numbers up to that percent. Our pipeline is at the strongest level it has ever been. And we are closing more than we have ever done historically. But the best news for us is that as we are closing so many loans, our pipeline is still staying at the same level. So in the current environment, we are very, very optimistic. And we just hope it continues. And the numbers are just extraordinarily strong for us right now in the pipeline is strong. And the good news too on a technology basis and personnel basis, we are able to handle this volume and these increases with about the same staff maybe even less than we had last year.

Great. And Paul thinking about the MSR marginal notes, you touched on the gain-on-sale in Steve’s question, but MSRs have been I don’t know if elevated is the right word, the higher the last two quarters given the longer duration, it looks like you mentioned 10 to 12 years earlier, is this higher gain on sale or sorry, higher MSR margin something we should see continue or how do you think about that as we move forward?

Yes, Steve. It’s a great question. And it has been elevated the last few quarters and it’s a combination of a few factors. One that you mentioned and Ivan mentioned, we are seeing more 10 12-year products than we ever had before. So the longer duration of that service and fee obviously had a premium value to it. Especially being prepayment protected, the lockouts are longer. And the second aspect is the industry as a whole. And we have seen the real benefit from this is our servicing fees on our new Fannie Mae loans have been very, very strong. We have been getting 60 70 basis points on new Fannie Mae loans that we have put on as servicing. How long would that continue? Will be dependent on many factors, but clearly, that combination of higher servicing fees and longer duration locked out assets has grown this MSR rate and I do think in the near term that is a sustainable MSR rate at this point.

Great. Appreciate the color there. Switching over to the balance sheet portfolio, can we talk about capacity to grow from here? Are we really going to continue to see no reinvestment or repayments I don’t have the numbers right in front of me. But I think it was a slight positive I think $120 million maybe of growth, but we talked about the capacity to grow the on balance sheet portfolio and what you are seeing there with the new investment opportunities?

So, the market is fairly competitive right now even more than I thought, we have been able to maintain our level and grow a little bit, because as we indicated on the prior earnings calls when it was dislocated we were still originating when most people were out of the business. So, we were able to build a little bit of a pipeline and now things are remaining competitive. We have a little bit of advantage which we have all liability structures in place that we put in place with our CLOs. So we have competitive funding, which gives us an edge. We will maintain our balance sheet in my view and try and grow a little bit. It all depends on how much runoff that occurs, but our outlook is that we should be able to maintain and grow it a little bit through the fourth quarter.

Great. Appreciate you taking my questions this morning.

Thanks, Stephen.

[Operator Instructions]

I think I see Charlie in the queue.

And we will move next with Charlie with JP Morgan. Please go ahead. Your line is open.

Hi, good morning, guys. Thanks for taking the questions. Most have been covered already, but I was wondering if you could give any update and really your outlook for APL in the private securitization market? I mean, with the agency business still growing nicely and as you mentioned, the pipeline looking pretty good heading into year end next year. How do you guys think about the trajectory of that segment over the next year or so?

I think it’s going to be very slow. I think the spread between where the agencies are and where the APL execution is too wide right now to generate significant volumes. There are some products that fit well into it, but we think it’s going to be very slow going. Right now, agency originations on a gross coupon are somewhere between 275 and say 310. And on the APL side, you are at least 50, maybe 75 basis points wide of that. So, we don’t see that as something that we are going to be able to do in large scale. And our net securitization if we were going to do, we will probably on the $300 million to $400 million mark, it would probably take us based on what we are seeing another 3 to 4 months to aggregate that kind of collateral. So, it’s a slow go right now based on where things are at.

Appreciate the color, Ivan. Thanks.

It appears that we have no further questions at this time. I would now like to turn the program back to Ivan Kauffman, CEO for any closing remarks.

Alright. Well, thanks again for your participation. It’s been a record and outstanding quarter and the great news is there is more to come very optimistic about our pipeline, our balance sheet and our performance and looking forward to great fourth quarter in the conclusion of fantastic year and some very, very difficult – very difficult times. So everybody, stay healthy and stay tuned. Have a great day. Bye-bye.

That will conclude today’s program. Thank you for your participation and you may disconnect at any time.