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Edited Transcript of ABR earnings conference call or presentation 1-Nov-19 2:00pm GMT

Q3 2019 Arbor Realty Trust Inc Earnings Call

Uniondale Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Arbor Realty Trust Inc earnings conference call or presentation Friday, November 1, 2019 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. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Jade Joseph Rahmani

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

* Richard Barry Shane

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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Arbor Realty Trust Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the call over to your speaker today, Paul Elenio. Please begin, sir.

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, 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, 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 risk and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectation 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 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 reflects an 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 9 years, which reflects an 11% increase in duration over the last 2 years. And as a result, we have created a very significant, predictable annuity of income of $87 million gross annually and growing, the majority of which is prepayment protected. This growth in our servicing portfolio also continues to increase the annuity of income from our escrow balances, which are currently earning $19 million annually for a combined annual run rate of servicing income and escrow earnings of $106 million.

We also had a very strong originations quarter closing $1.4 billion in agency loans, and our pipeline remains strong, providing us with confidence in our ability to produce consistent origination volumes for the balance of the year. We are also very pleased in our ability to continue to generate strong margins on our loan sales despite the extremely competitive landscape. And these income streams from our agency platform continue to create significant diversity and a high level of certainty in our income streams.

There's been a lot of talk lately about the potential for the GSE reform and the effect that it has and the new cap could have on GSE lenders in the future. The new cap for 2020 has been increased and represents approximately 40% of the projected 2020 multifamily market. The new cap also eliminates any exceptions and mandates that 37.5% be directed towards mission-driven business or affordable housing. Our GSE production historically has been mostly in the affordable housing market. And therefore, we believe that the increase to the cap, combined with a large portion being dedicated to the affordable housing component, puts us in a favorable position to be able to continue to grow our agency production going forward.

In anticipation of a potential reduction in the agency footprint, which did not occur, we launched our Arbor private label program. In the beginning of the third quarter, the industry experienced a slight disruption as the agency caps were being navigated. In that short period of time, we had a competitive advantage in the market, and were able to build a pipeline of $600 million to $700 million of this product, which we expect to close and securitize in the first quarter of 2020. And we believe the development of this product line will further diversify our lending platform and act as a mitigant against any further changes to the agencies.

With respect to our balance sheet business, we experienced tremendous growth in our loan book. We grew this portfolio 24% in 2018 and another 21% already for the first 9 months of this year on nearly $2 billion of originations. Our balance sheet portfolio is now at $4 billion, and the significant growth we experience will continue to increase our run rate of net interest income going forward. It is also significant to note that almost 80% of our portfolio is in multifamily assets, which is clearly the safest asset class. We also have a very robust pipeline, which will allow us to continue to grow our loan book for the balance of the year. And as a result of this strong pipeline, we elected to raise $120 million of fresh capital in October through a 4.75% unsecured debt issuance that was 100 basis points tighter than our last debt issuance in March. This was very attractive capital as it will be used to fund our pipeline of new investments and be immediately accretive to our core earnings.

We continue to have tremendous success through our securitization expertise and our strong banking relationships in substantially reducing our debt costs, which has allowed us to achieve significant economies of scale and maintain our margins in a very competitive market. And again, the income generated from our balance sheet loan book is a significant component of our earnings, and we remain very confident in our ability to continue to grow this income stream.

Updating you now on our single-family rental business. We continue to make considerable progress in developing our platform, and we are committed to becoming a leader in this space. We're very pleased with the continued growth we are seeing in our pipeline of opportunities by leveraging off our existing originations capacity and capabilities. We have closed approximately $100 million of single-family rental product to date, and we believe this is a phenomenal business with enormous opportunity in both the bridge and permanent lending products, and we are confident that we will build this out to be a significant driver of yet another source of income stream and further diversify our lending platform.

Overall, we are extremely pleased with our progress and the tremendous success we continue to have in growing our operating platform. The quality and diversity of our income streams makes us very comfortable with the stability of our dividend and confident based on our strong baseline revenues that the current status of our pipeline we'll be able to consistently grow our dividend in the future and continue to generate outsized 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. - Executive VP, 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, 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 in 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 we 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 pretax income in the third quarter on approximately $1.4 billion in originations and $1.5 billion in loan 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 servicing rights income related to $1.5 billion of committed loans during the third quarter, representing an average MSR rate of around 2.02% compared to a 1.44% rate for the second quarter, mostly due to some large deals that we closed in the second quarter, which generally have a lower servicing fee.

Our servicing portfolio grew another 3% during the quarter to $20 billion at September 30, with a weighted average servicing fee of 43.5 basis points and an estimated remaining life of 9.2 years. This portfolio will continue to generate a predictable annuity of income going forward of around $87 million gross annually, which is up approximately $5 million on an annual basis from the same time last year.

Additionally, early runoff in our servicing book continued to produce prepayment fees related to certain loans that have yield maintenance provisions. This accounted for $5.3 million in prepayment fees in the third quarter, which was up from $3.5 million in the second quarter. The earnings associated with our escrow balances also continues to grow and contribute meaningfully to our recurring income streams. We currently have approximately $950 million of escrow balances, which are earning around 2%, and the earnings associated with these balances are up approximately $4 million or 29% on an annual run rate as compared to this time last year.

In our balance sheet lending operation, we grew our portfolio 21% for the first 9 months of the year to $4 billion. And based on our current pipeline, we remain extremely confident in our ability to continue to grow our balance sheet investment portfolio in the future. Our $4 billion investment portfolio had an all-in yield of approximately 7.04% at September 30 compared to 7.34% at June 30. The average balance in our core investments was up from $3.6 billion last quarter to $3.9 billion this quarter due to our second and third quarter growth. And the average yield on these investments was 7.31% for the third quarter compared to 8.24% for the second quarter, mainly due to default interest collected on our second quarter loan payoff, higher interest rates on runoff as compared to originations and from a reduction in LIBOR during the third quarter.

Total debt on our core assets was approximately $3.5 billion at September 30, with an all-in debt cost of approximately 4.65% compared to a debt cost of around 4.96% at June 30, mainly due to a reduction in LIBOR during the third quarter. The average balance on our debt facilities was up to approximately $3.5 billion for the third quarter from $3.4 billion for the second quarter due to financing our portfolio growth. And the average cost of funds in our debt facilities decreased to approximately 4.87% for the third quarter compared to 5.35% for the second quarter due to $1.2 million of noncash fees that were accelerated from the early unwind of CLO VI in the second quarter, the full effect of lower borrowing costs associated with our new CLO and from a reduction in LIBOR in the third quarter.

Overall, net interest spreads in our core assets were down to 2.44% this quarter compared to 2.89% last quarter, again, mainly due to default interest received in the second quarter and higher interest rates on runoffs as compared to originations. And our overall spot net interest spread was relatively flat at 2.39% and 2.38% at September 30 and June 30, respectively, mainly due to the positive effect of LIBOR floors on a portion of our balance sheet portfolio and from reduced borrowing costs from our recent CLO execution. The average leverage ratio on our core lending assets, including the trust preferreds and perpetual preferred stock as equity was down slightly to 80% in the third quarter as compared to 81% for the second quarter. And our overall debt-to-equity ratio on a spot basis, including the trust preferreds and preferred stock as equity, was also down to 2.5:1 at September 30 from 2.6:1 at June 30.

Lastly, we also had another very strong quarter from our residential banking joint venture. This investment generated $2.6 million of income to us this quarter, mainly due to the success we continue to have in building out the retail branch networks and from the current interest rate environment. We also expect to record additional income from this investment in the fourth quarter that will be more in line with past fourth quarter performances due to the normal seasonal nature of this residential banking business. And this success continues to demonstrate the diversity of our income streams and the value of our operating franchise.

That completes our prepared remarks for this morning, and 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 Steve Delaney of JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [2]

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The gain on sale margin a 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% a reasonable -- given your mix of business, a reasonable level for us to project on the MSR gain?

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

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Sure, Steve. I think you said gain on sale, but I think you meant MSR rate.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [4]

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I meant MSR, my bad. Yes.

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [5]

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Yes. So the MSR rate was 2.02% for the quarter, it was higher than it was last quarter for the reasons you mentioned, we did have some larger loans that we closed in the 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 was 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 more Freddie than Fannie, which I don't anticipate, we think that MSR rate could be high going forward.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [6]

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All right, great. That's helpful. 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 your yield maintenance. Is -- do you attribute that -- do you consider what you saw kind of routine? Or was it the drop in the 10-year from 2.50% early in the year to 1.70%? Did you think that there are people actually that are bailing out early and refying their GSE loans?

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Paul Elenio, Arbor Realty Trust, Inc. - Executive VP, CFO & Treasurer [7]

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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 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.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [8]

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Sure. I think it's not just a product, a lot of -- can you hear me?

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [9]

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Yes, I got you now. I got you now.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [10]

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Okay. Yes, it's not just a product of refinancing. I think when 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 a factor, 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.

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Operator [11]

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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 [12]

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I want to follow up on a couple things from Ivan, I believe, in your prepared remarks. On the private label side, $81 million of originations in Q3. What should we think about as 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 2?

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

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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 say we're 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, 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're 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 nonmission business.

So if they're less aggressive on the nonmission-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. Or sometimes they have a sponsor concentration and that affects them as well. So there are a various number of factors that exist. But we would not expect the amount of private label business we've -- 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're taking more and more of the market. So I would anticipate seeing us at a lower run rate than what we have in the pipeline right now. What we have in the pipeline right now suggested probably about a $2.5 billion securitization level to $3 billion for 2020. I'll expect that to be probably half.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [14]

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Great. I appreciate the color there. 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 comments, $100 million to date. 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 to 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?

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

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So I think we've been able to absorb the cost in our operating numbers for 2019. And I believe that for 2020, we'll 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 a 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 some loans on our balance sheet producing positive earnings.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [16]

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Fantastic. And then thinking about the competition side. When you look at your competitors, are you seeing 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're addressing that competition in the market?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [17]

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Yes. There's constant pressure on spreads. On the balance sheet side, spreads have come in considerably. I'd say they're in another 25 to 35 basis points in the last 4 months since our last quarterly call. However, we've been able to get a lot of economy of 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 aggressive in what we do and weighed 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 the 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.

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Operator [18]

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(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 questions. Jade Rahmani with KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [19]

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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 in the single-family rental space, there's definitely a need for institutional property management because of the scale requirements and economics in that business. And also, I know you've made investments in technology and technology has been the theme as well. So could you comment on that?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [20]

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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 a lot of infrastructure with the margins being very, very low. We're also afraid of some of the headline risk that might come along with that because the property management and some of the negative things that can occur when you're managing properties. There is some headline risk from time to time whether it's justified or not that we felt was probably not where we want it to be as a public company and affect the rest of our businesses. The only real issue for us is whether the synergies from managing properties and creating financing opportunities would offset all that and create additional revenue streams. And we're not sure it does. So we think there are better places to put our capital and management at the present time.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [21]

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Turning to the overall commercial real estate business. It seems like you have a very positive view towards multifamily as well as single-family rental and lower-risk dynamics in residential housing in general, particularly affordable focused. 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 net lease?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [22]

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So we've 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 health care. So we're not major players in that area, we're more opportunistic, we're 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.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [23]

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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?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [24]

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Our feeling is that we're at a certain point in time in the cycle, there's a lot of liquidity, there are a lot of new players, there's a lot of syndicated capital and you have a lot of 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 cautious in this point in time in the cycle. So we do expect there to be a little bit of a 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 has been very, very positive for the multifamily asset performance and a very attractive interest rate environment. Those are 2 variables that nobody can control right now, but we're very conservative in the way we underwrite our loans for rent growth as well as exit cap rates and exit interest rates on our loans, but now would be the period of time to be cautious.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [25]

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And touching on the dividend, what drove the decision to again raise the dividend just with the factors you mentioned, rate spreads being an uncertainty, why not choose instead to be more defensive and to paying some additional capital?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [26]

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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 core 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 year-to-year. And we have -- we're still at a very low payout ratio. We feel there's a lot of room, and we're 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.

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Operator [27]

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And 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 [28]

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Ivan, I appreciate the commentary on the private label in response to Steve's question. I'd love to talk about it 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 steady-state basis, how do you look at the economics versus the agency business? How do you decide in periods where there is capacity on the agency side whether or not to do private label loans?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [29]

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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 that footprint will shrink 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 a 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 250 to 275 over. And now they're actively quoting from 190 to 210 or 215 over, which is right around where we're quoting, and if they get inside of that, there won't be sufficient enough product. But if they widen, it will be. So right now, it's kind of borderline with the agencies probably going to dominate that market again. So we'll have to wait and see how it works.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [30]

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

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [31]

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So we think that it lies somewhere between the 2 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 it lies right in between.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [32]

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Okay, great. So it probably will only impact gain on sale margin at the margin?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [33]

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Paul, what's your feeling on that?

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

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Yes, I think that's right. I think it will 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 2 agencies. Obviously, Fannie being more robust on the servicing fee side and on the gain on sale side than Freddie. So if it falls in between those 2, it likely doesn't move the margin in total significantly unless it's a bigger part of our book, and 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.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [35]

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Yes, there are some factors on that. The larger deal you do, you could absorb your fixed expenses, and that has a big impact on the market. We originally targeted doing a $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 0.25% 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 at the trade comparable to the CMBS market. We think with our brand, our expertise in the securitization market, us maintaining part of the B-piece 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 a little early to say exactly where we come out. But right now, it's looking very favorable.

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Operator [36]

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(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.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [37]

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Well, 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 very optimistic to complete the rest of the year in a very positive way. Thank you again. Take care, everybody.

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Operator [38]

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