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Edited Transcript of ABR earnings conference call or presentation 2-Nov-18 2:00pm GMT

Q3 2018 Arbor Realty Trust Inc Earnings Call

Uniondale Nov 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Arbor Realty Trust Inc earnings conference call or presentation Friday, November 2, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ivan Kaufman

Arbor Realty Trust, Inc. - Chairman, President & CEO

* Paul Elenio

Arbor Realty Trust, Inc. - CFO & Treasurer

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Conference Call Participants

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* Benjamin Ira Zucker

BTIG, LLC, Research Division - Analyst

* Leon G. Cooperman

Omega Advisors, Inc. - President, CEO & Chairman

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Ryan John Tomasello

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Stephen Albert Laws

Raymond James & Associates, Inc., Research Division - Research Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Arbor Realty Trust Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Paul Elenio, Chief Financial Officer. Please begin, sir.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [2]

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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, 2018. 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.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [3]

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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've had another very strong quarter with many significant accomplishments, which continues to demonstrate the strength of our brand and the value of our operating franchise.

Our third quarter earnings were once again well in excess of our current dividend, allowing us to increase our quarterly dividend another 8% or $0.03 to $0.27 a share, and our dividend is now at an annual run rate of $1.08 a share. This significant increase in our quarterly dividend comes 6 months earlier than we originally projected and with a consistent core earnings base that continually exceeds even our new increased dividend run rate, we have created a substantial cushion above our dividend.

Additionally, our income streams are very diversified and long-dated providing a predictable and reoccurring annuity of core earnings, making us very comfortable with our dividend increase and confident in our ability to increase our dividend in the future.

Furthermore, we've mentioned that -- as we mentioned on our last call, we recorded a large gain in the third quarter from a litigation settlement. And as a result, we also expect to pay a special dividend before the end of the year related to this income. I would like to emphasize here that this special dividend will be in addition to and separate from our increased quarterly dividend.

In the third quarter, we continue to experience tremendous growth in both of our business platforms. In our Agency Business, we continue to produce significant originations volume with strong margins. We originated $1.4 billion in agency loans in the third quarter, which is a highest quarterly total in our history. In addition, we've originated $3.5 billion in loans for the year so far. And based on our current pipeline, we expect our 2018 originations to exceed our record origination volumes from last year.

Additionally, our servicing portfolio has grown another 4% this quarter and over 40% in the last 2 years and now stands at $17.8 billion. This portfolio generates a servicing fee of 46 basis points and has an average remaining life of almost 9 years, which reflects a 20% increase in duration over the last 2 years.

As a result, we have created a very significant long-dated, predictable annuity of income of over $80 million gross annually and growing, which is mostly prepayment protected. This income stream from our servicing portfolio, combined with the fee income we generate from our originations, has also created diversity and a high level of certainty in our income sources.

With respect to our balance sheet business, we continue to experience tremendous growth. We grew our investment portfolio 48% in 2017 and another 20% for the first 9 months of this year and over $1.2 billion in new originations. This income generated from the assets is a significant component of our earnings. And based on our strong pipeline, we remain confident in our ability to continue to grow this income stream in the future.

And with the significant economies of scale we have been able to achieve, along with our ability to substantially reduce our debt costs in our borrowing facilities, we have been very successful in maintaining our margins and generating levered returns in excess of 13% despite an extremely competitive environment.

Additionally, as we've discussed on our last call, we did a great job in the third quarter with our new convertible debt issuances that reduced our debt cost and generated additional accretive capital to fund the growth in our business, which we anticipate will increase our annual AFFO by $0.02 to $0.03 per share. We're also pleased with the significant progress we have made in increasing our float, liquidity and market cap, which will allow us to access capital more efficiently and effectively in the future and continue to grow our earnings.

All of this success had made us very comfortable with our current dividend and our ability to continue to grow it in the future, and we've done a great job in continuing to diversify and long-date our income streams and create certainty and growth within our business. Overall, we're extremely pleased with the progress we continue to make in growing our business and increasing the value of our franchise and the significant returns we've generated for the shareholders.

Our results have been truly remarkable and have consistently outperformed our peers. We are a complete operating franchise with a significant diverse and capital-light Agency Business, which has allowed us to consistently increase our earnings and create more predictable, stable and long-dated income streams. We also continue to build a substantial cushion of core earnings above our dividend, resulting in a lower dividend payout ratio and are confident in our ability to continue to grow our dividend in the future.

Again, we're extremely pleased with our results, and we remain committed to working very hard to continue to maximize the returns to our shareholders.

I will now turn the call over to Paul to take you through the financial results.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [4]

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Okay. Thank you, Ivan. As our press release this morning indicated, we had a very strong third quarter with adjusted AFFO of $41.4 million or $0.42 per share. We also produced core AFFO of $0.32 and $0.91 per share for the third quarter and 9 months ended September 30, excluding a onetime litigation settlement gain and noncash acceleration of fees on early extinguishment of debt.

This reflects an annualized return on average common equity of approximately 14% for the third quarter and 13% for the first 9 months of the year. These ROEs are up over 20% from the same time last year due to a significant portion of our earnings that are being generated by our rapidly growing capital-light Agency Business and from the additional cost efficiencies we're experiencing as we continue to scale our balance sheet business.

As Ivan mentioned, we're very pleased with our ability to continue to generate core earnings well in excess of our current dividend, which has allowed us to once again increase our dividend earlier than we expected and we remain very confident in our ability to increase our dividend in the future.

Looking at our results from our Agency Business, we generated approximately $19 million of income in the third quarter on approximately $1.4 billion in originations and $1.2 billion of loan sales. The margin on our third quarter sales was 1.47%, including miscellaneous fees compared to 1.53% all-in margin on our second quarter sales. And we recorded commission expense of approximately 39% on both our second and third quarter gains on sales.

We also recorded $25.2 million of mortgage servicing rights income related to $1.4 billion of committed loans during the third quarter, representing an average mortgage servicing rights rate of around 1.83% compared to 1.66% on second quarter committed loans of $1.1 billion. This was mainly due to a shift in product mix in the third quarter, resulting in higher servicing fees.

Sales margins and MSR rates fluctuate primarily by GSE loan type and size. Therefore, changes in the mix of our loan origination volumes may increase or decrease these percentages in the future. Our servicing portfolio also grew another 4% during the quarter to $17.8 billion at September 30, with a weighted average servicing fee of approximately 46 basis points and an estimated remaining life of approximately 9 years.

This portfolio will continue to generate a significant predictable annuity of income going forward of around $82 million gross annually. Additionally, early runoff in our servicing book continues to produce prepayment fees related to certain loans that have yield maintenance provisions. This accounted for $7.5 million in prepayment fees in the third quarter, which was up from $4.9 million in the second quarter. These fees are recorded in servicing revenue, net of a write-off for the corresponding MSRs on these loans.

We also continue to increase our interest-earning deposits with over $500 million of escrow balances from our agency servicing business, which are earning slightly less than 1 month LIBOR. These balances provide a natural hedge against rising interest rates, as they will generate significant additional earnings power as rates continue to rise. In fact, for every 1% increase in interest rates, these deposits could earn an additional $0.05 a share in additional earnings annually.

In our balance sheet lending operation, we have grown our portfolio 20% to $3.2 billion on $1.2 billion in originations thus far in 2018. This significant growth continues to increase our core earnings run rate. And based on our current pipeline and deep origination network, we remain extremely confident in our ability to continue to grow our balance sheet investment portfolio in the future.

Our $3.2 billion investment portfolio had an all-in yield of approximately 7.52% at September 30, which is up from a yield of approximately 7.40% at June 30, mainly due to an increase in LIBOR. The average balance in our core investments increased to $3.3 billion for the third quarter from $2.9 billion for the second quarter, due to a significant growth we experienced in the second quarter and from the timing of our originations and runoff in the third quarter. And the average yield on these investments is approximately 7.40% for both the second and third quarters.

Total debt on our core assets was approximately $2.9 billion at September 30, with an all-in debt cost of approximately 5.03% compared to a debt cost of around 4.93% at June 30, mainly due to an increase in LIBOR.

The average balance on our debt facility has increased to approximately $2.9 billion for the third quarter from approximately $2.5 billion for the second quarter, primarily due to financing our second and third quarter originations and the average cost of funds on our debt facility decreased to approximately 4.93% for the third quarter compared to 5.01% for the second quarter, excluding $2.9 million of noncash fees we expensed related to the early payoff of debt in the second quarter, despite an increase in LIBOR during the quarter.

This was mainly due to the significant reduction in interest cost we've experienced from improved terms in our warehouse lines, our new CLO execution and the replacement of our higher cost unsecured debt with new lower cost unsecured debt.

Overall, net interest spreads in our core assets on a GAAP basis increased to 2.44% this quarter compared to 2.39% last quarter, excluding certain noncash fees expensed from early payoff of debt, mainly due to reduced debt cost in the third quarter.

Our overall spot net interest spread was also up to 2.49% at September 30 from 2.47% at June 30. And with approximately 88% of our portfolio comprised of floating rate loans, we will see an increase in net interest income spreads as interest rates continue to rise in the future.

Additionally, as Ivan mentioned earlier, we believe the execution of our new convertible debt issued in July at lower rates will increase our annual AFFO by $0.02 to $0.03 a share.

And lastly, the average leverage ratio on our core lending assets, including the trust preferreds and perpetual preferred stock as equity, was relatively flat at 79% in the third quarter versus 78% in the second quarter, and our overall debt-to-equity ratio on a spot basis, including the trust preferreds and preferred stock as equity, was flat at 2.5:1 at both September 30 and June 30.

That completes our prepared remarks for this morning. I'll now turn it back to the operator to take any questions you may have at this time. Norma?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jade Rahmani of KBW.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

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This is actually Ryan Tomasello on for Jade. Just firstly, you called out the higher prepayment fees in the quarter. So my first question is, what factors do you view as driving this since the prepayment fees have been increasing sequentially over the past few quarters? And then as a follow-up to that, is that considered taxable income? And what do you view as a more normalized level of prepayment fees?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [3]

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It's Paul. It's really hard to predict. I think part of the reason we're seeing some prepayment fee increases are, one, our portfolio is growing. So as a percentage, it's probably not growing as much. There's still lot of transactions out there, deals are getting done at higher values and people are transacting and just prepaying off their debt and writing that yield maintenance check. It's hard to predict. I mean I would have thought it would have settled in at this point. It still seems to be spiking up. I don't know where it goes, but our portfolio is growing. So it could end up increasing over time. As a percentage, it should stay relatively flat. As far as whether it's taxable or not, it depends on what the prepayment fee is related to. As you know, we have a strategy in place where we sell off the excess servicing -- of the servicing fee from our TRS to our REIT. And therefore, that excess servicing is not taxable. If the prepayment -- when the prepayment fee is received, we allocate a portion of the prepayment related to the excess and relate it to the primary. So a piece of it goes into TRS and is taxable and a piece of it is not. It goes into the REIT.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [4]

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Okay. That's helpful color. And then switching to the balance sheet business, I was wondering if you can just give us some color on the types of originations in the quarter. Maybe the average spread on those, the property type, size of loans and geography.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [5]

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Paul, you have the numbers, so why don't you got over that? But our balance sheet business continues to be fairly consistent and hasn't changed materially in terms of the mix and our borrower base, but Paul, you have the details.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [6]

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Yes. That's right. Ivan is right. We really haven't seen much of a change. We're pretty consistent with where our portfolio is, and it's pretty consistent on our originations for the quarter. So we originated $287 million of loans of this 18 loans, so an average loan size of about $16 million. The all-in rate on those loans is about 7.5%, the 11% returns, adjusted about 13% as we spoke. 80% of the originations were multifamily, and that's pretty consistent with our portfolio at 75%. And almost all of the originations were senior debt with bridge loans. We did one small tail as a mezzanine loan on top of the bridge loan during the quarter. But that's how we've laid out the quarter. And geographically, it's been pretty consistent with where the portfolio -- the $3.2 billion portfolio has been as well.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [7]

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And just going back to the servicing book. The -- it continues to contribute an increasingly stronger amount to your earnings which is nice, given it's recurring. But just looking at the average servicing rate, it's declined at an accelerating pace over the past few quarters, which looks to be driven by the margins in the Fannie book. So I was just wondering if you can give us some color on what's driving that trend and if you expect this compression in the fee rate to continue.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [8]

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Yes. It's actually less related to Fannie Mae and more related to Freddie Mac. So in the past, our portfolio was -- it still is very dominant by Fannie Mae, but we've been a dominant player in the SBL side than Freddie Mac business, and those servicing fees are smaller than the Fannie Mae servicing fees. So it's just mix that's really changing it. But we're pretty happy with what we've been able to maintain here. We're sitting at 46 basis points -- I think as high as 47 to 48. So it's not really declining that much in our mind considering the type of product mix we're doing. It's really more mix than it is servicing fee. The servicing fees per product has been holding for Fannie and Freddie. It's just how much Freddie we've done relative to the overall book.

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Operator [9]

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Our next question comes from Ben Zucker of BTIG.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [10]

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I guess, what I really want to focus on was the agency origination volumes. We were getting pretty accustomed to you guys putting up something in the $1 billion range plus/minus $100 million or so. And obviously, 3Q came in well above that level. And I'm just curious, what you think drove the sudden surge. Is this a prospect of higher rates that's pulling business forward? Or just what are you guys seeing in the market right now?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [11]

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I think it's really hard to say. Originations can be a bit lumpy. Sometimes a movement in rates move things along. Sometimes there's a little bit of slowness. I would say that the first 2 quarters, we were slightly behind where we were originating in prior years, and maybe it just got moved. We have a good pipeline. And it's not unusual for there to be a little lumpiness from quarter to quarter. And there are various external factors that can create that. And clearly, when you have the kind of rate move that occurred, sometimes that facilitates things, sometimes it stalls things. In this case, I think there was some facilitation.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [12]

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Yes. I hear you there and I understand the push and pull and looking at things annually rather than quarterly. If I could ask that maybe another way. I'm not going to ask if $1.4 billion is a sustainable origination level for you guys, but would you say that you have an upward bias relative to the recent $1 billion mark that we just referenced and we've seen from you guys over the last 5 quarters?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [13]

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I can't really comment on that other than to say that we have a healthy pipeline. And we -- as we said in our prepared remarks, we expect our origination volume to exceed last year's, and we have a good trend going. I really can't comment on that for 2019 as we don't know where interest rates will be and what other external factors are. Our originating franchise continues to be strong, growing, having a lot of depth with a tremendous amount of loyalty and repeat business. So we have the fundamentals to continue to grow our business, but we'll proceed with caution, especially in a competitive environment that exists today. And I think it's going to grow quarter to quarter for us.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [14]

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Okay, that's helpful. And then my question on margins was asked about -- was already asked and answered. But on the liability side, I'm just trying to get an idea of what the balance sheet might look like as we kick off 2019 because this is our last time speaking until February or March. Are there any CLOs outstanding that you are able to or looking at unwinding as 2018 comes to a close?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [15]

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I think that we do have a CLO, which is core protected. And I think the core protection ends in the end of the first quarter. We have to really just evaluate where we are in the origination side and the utilization of those facilities. But at the moment, that would be the next one that goes out outside of that core protection. But a lot has to do with our overall volume and our originations and our runoff. And we'll measure that on a quarter-to-quarter basis at this point.

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Operator [16]

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Our next question comes from Stephen Laws of Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [17]

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As others have mentioned, congratulations on the dividend increase occurring earlier than you guys anticipated. A number of the specific questions have been asked. I wanted to maybe follow up on something you guys touched on last quarter and then was reading an article about it this morning, but the caps at the GSEs and kind of what their outlook is for next year. I know a good portion of your volume is in product that I think are outside of those caps. But can you maybe comment about where you think those will go and what kind of impact that's going to have on your business?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [18]

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We are somewhat involved in what's going on in the GSE situation. Right now, there is no indication really any which way that is going to go, whether they are going to change the cap, increase it or decrease it. But there appears to be some level of consistency in terms of what they intend. There's no radical movements that are planned. If you follow GSEs, Mel Watt's term is up and they will be looking for a new replacement. Mel Watt's done an outstanding job as being a good steward of housing and affordable housing, and we hope the new appointment maintains a consistent philosophy.

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Operator [19]

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Our next question comes from Steve Delaney of JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [20]

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Obviously, a lot's been covered. Paul, thanks for the update on escrow balances. If I look at that $500 million, just trying to think about what it might look like in 2 years. As a percentage of $7.8 billion, it looks like somewhere between 2.5% and 3% on UPB. Is that the way you guys see it? As you grow your MSRs, your escrows are going to kind of grow by a couple of percent?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [21]

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Yes, Steve, it's a good question. It sounds about right. It does go up and down a little bit. As you get close to the end of the year and the first quarter, the escrow balances kind of decline, because you're paying all your taxes and insurance. So it's a little bit lumpy. But I would say that, that percentage is probably in the range of what we see on where this could grow. So yes, if our portfolio grows, adding that same percentage is probably accurate.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [22]

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Okay. No, that's helpful. And then obviously, what you've got is working extremely well, and you guys are to be congratulated for it, for building what you have. But as you look ahead, maybe a couple of years, business conditions change. Are you seeing opportunities to further expand or diversify the product line under the Arbor brand to just sort of diversify, if you will, and maybe reduce some of the operating risk to any changes that could possibly come at the GSEs? Just curious about the platform today versus your vision of the platform in 3 to 5 years.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [23]

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So a couple of comments on that. As we announced a few quarters ago, we became a approved seller for Freddie Mac on single-family rental homes. We did a good job entering that business. And since then, the FHFA decided that was not a business they wanted Freddie Mac in. We are now investing very heavily to build that infrastructure and develop that product line. And we believe we will be a active player in that market, along with a good balance sheet, a tremendous background in single-family lending and now a good track record of entering that business. We will develop that business line, and I think that will help diversify. With respect to what happened with the agencies, whether they hear it or not, what we do is we produce multifamily loans and we produce them on a very consistent basis between securitization and the proper execution and having the right balance sheet. Even if the agencies go away, we're always prepared to figure out how to be an effective player in the market. I think we have a strategic advantage to some of our peers because of that capital base, not being in a regulated environment and having the ability to hold the pieces and effectively securitize. We are one of the most efficient securitizers on the CLO side. I don't think anybody has a brand we have. So we would be able to shift production and be able to execute it into the market effectively, I think we have a real advantage over our peers.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [24]

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On the single-family rental, obviously, it does tie in your sales force. Your producers are out there around the country and exposed to those opportunities. In the -- with the pilot program, you would assume originating sale to Freddie Mac. Going forward, do you see where you would use the private securitization market as sort of a hold them on your books in warehouse, you get to an efficient size of several hundred million securitized, and then you hold the subordinate, retain the risk in those portfolios?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [25]

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Yes. It would be 2 things. It would be to originate loans for securitization, which we're putting the right securitization step in place right now. And a second component of that business was -- would be very similar to what we do on the multifamily side is bridging these loans until they are leased up and then feeding them into the securitization. So we'll do both components of that business.

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Operator [26]

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Our next question comes from Rick Shane of JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [27]

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When we look at the increase in MSR income sequentially, it looks like about 2/3 of it was volume driven and 1/3 was mix driven. I'm curious how we should think about the Fannie, Freddie mix. Obviously, it's much more profitable for you to originate and add this Fannie MSRs to the balance sheet. How do you -- what sort of drive that? Externally, how should we be thinking about that mix?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [28]

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First, historically, except for the SBL side, we've been a very active Fannie Mae lender. And they are 2 different models. And from an origination side, our systems and processes are set up to be very efficient on that side. But a lot is driven by which agencies have a desire to compete in different sectors. Freddie Mac has typically been more competitive on the larger loan size. A lot of our business is, generally, in the $3 million to $25 million range, which Fannie Mae is extremely competitive on and continues to be. I think if we shift to larger loans, greater loans, it will be more of a tendency to be on the Freddie Mac side. The business we do on the SBL side is more balanced with Freddie. That is somewhat consistent with the margins and profitability that we have on the Fannie Mae side. But it will be dictated based on the competitive forces in the market in general and which agency wants to be more aggressive on which product type.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [29]

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Got it. That's interesting. So it's actually less borrower driven and more agency driven?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [30]

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I'd say it's very much agency driven. There are some borrowers who are more comfortable with one agency than the other. But that's not really the dominating factor in the marketplace. You always have somebody who is more attracted to a particular brand and won't move, but that doesn't happen too often.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [31]

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Okay. Paul, quick -- just a cleanup question for you. When we look at the AFFO number, that does not exclude either the legal settlement or the refinance of the converts?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [32]

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Correct. And that's why I gave you a few numbers, Rick, today was -- we reduced AFFO. We put out $0.37. If you back out the litigation gain and back out the extinguishment of debt charge, and that's the way we look at it, the core came in at $0.32. And so we gave you that number as well, but the reported AFFO number includes both the charge and the gain.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [33]

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Got it. Yes. We were getting to the $0.32 number as well. But with all the different earnings numbers, I just want to make sure we're looking at the whole deck.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [34]

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Yes, you have it right.

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Operator [35]

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Our next question comes from Lee Cooperman of Omega Advisors.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [36]

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First, let me congratulate you, not just on the quarter, but the excellent job you've done in positioning the company over the last couple of years is to be congratulated. And also, Ivan, detecting your voice, you're not 100%, so hope you get better real quickly. So my questions. One, we've really now 13% to 14% ROE, do you look at that as sustainable given the nature of the repositioned company, number one? Number two, given the lending opportunities you see, how do you feel about capital adequacy? Do we have enough capital to run the business? And third, just to kind of on the income, what is the size of the extra that you think they were looking at if you've determined it yet? Thank you again for the great job you've done.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [37]

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Lee, thank you for the compliments. And it's Paul. So a couple things to your questions. One, the ROE, we're really pleased with where the ROEs went. We knew when we acquired this Agency Business. We spoke about it when we did the acquisition that it was a much higher ROE business. It was much less capital intensive. And we're really impressed with where the ROEs have gone. As far as is it sustainable, we do think it's sustainable. We actually think we haven't hit the full scale of this business yet. So as we continue to scale the business, both on the agency side and on the balance sheet side, we think those ROEs will be easily sustainable, if not improved, and that's a real accomplishment for us. Secondly, as far as capital, we're in a really good spot. We've been really good stewards of capital, as you know, and we're sitting right now with a significant amount of cash and restricted cash in our CLOs. It all depends on where runoff goes. And in the third quarter, we had slightly more originations than runoff. Obviously that could change if we had a big pipeline. If the pipeline is bigger in the fourth quarter and runoff slows, you'll use some of that capital. But we think we have a nice runway here, and we're in a really good shape from the standpoint of capital. Obviously, our needs for capital will depend on where our pipeline goes and where runoff goes, and we'll obviously only look to raise capital if we think it's immediately accretive to our earnings. And that's the way we've approached it. As far as the special dividend, we don't have the exact number yet, but we do think it's probably in the range of $0.10 to $0.12, which is what we talked about, I think, 2 quarters ago, which is mostly related to the gain from the litigation settlement. It could move up or down a little bit by the time we get to year-end, but that's the range we're pegging right now.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [38]

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Again, I have been a holder for a long time. Very happy and I'm really congratulating you on the great job you've done for all the shareholders.

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Operator [39]

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I'd now like to turn the call back over to Mr. Ivan Kaufman for closing remarks.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [40]

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Thank you, everybody, for participating and your support. It's been an outstanding quarter and an outstanding year-to-date. And we're very confident with what we put forth in increasing our dividend and our core earnings and look forward to another great quarter in the fourth quarter and concluding the year. Have a good day, everybody.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [41]

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Thanks, everyone.

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Operator [42]

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Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.