Earnings Call Transcript - ABR Q3 2020

Operator, Operator

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 a question-and-answer session. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please begin, sir.

Paul Elenio, Chief Financial Officer

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 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 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.

Ivan Kaufman, President and Chief Executive Officer

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 due to 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 diverse 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 remarkable third quarter results have once again allowed us to 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 were $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 in our GSE agency platform that continues to produce strong margins and increased servicing fees, continued growth, and significant benefits from the size and scale of our balance sheet business, substantial income from our residential business, strong performance of our multifamily-focused portfolios with very few delinquencies and extremely low forbearances, and reductions in our overhead and general and administrative expenses. These recurring benefits, combined with our projected originations, strong pipeline, and credit quality of our portfolio, put us in a unique position to be able to continue to produce significant core earnings going forward, and we are properly positioned to excel in this environment. The strong core dividends and the strong core earnings outlook have allowed us to once again increase our dividend, which now reflects an 11% yield based on yesterday’s closing stock price. Prior to the pandemic, we were trading at a much lower dividend yield of around 8%, which if applied to our current dividend, would result in a stock price of $16 a share. Again, we believe based on our resiliency and strong performance that we should be trading above those levels and we feel this is a great opportunity for our shareholders to realize substantial value appreciation. We continue to experience significant growth in our GSE agency platform. We originated $1.5 billion in GSE agency loans in the third quarter and $3.6 billion for the first nine months of this year, which is up approximately 11% from last year’s comparable period. Our pipeline is also at an all-time high, and as a result, we expect to produce a very strong origination volume in the fourth quarter and likely grow our agency production by as much as 20% to 30% over last year’s numbers while maintaining very strong gain-on-sale margins. In this unprecedented environment, our GSE agency platform continues to offer a premium value as it requires limited capital, generates significant long-dated predictable income streams, and produces substantial annual cash flow. Additionally, our $22.6 billion GSE agency servicing portfolio, which we have grown 12.5% already this year, is mostly prepayment protected and generates over $100 million a year in recurring cash flow. This is in addition to the strong gain-on-sale margins we continue to generate from our origination platform, which combined with new and increased servicing revenues, will continue to contribute greatly to our core earnings and dividends. From a liquidity perspective, we are very pleased to report that we have a current cash and liquidity position of approximately $500 million, which not only provides us with adequate liquidity to navigate the current market conditions, but also gives us offensive capital to take advantage of accretive lending opportunities. This has allowed us to replace our runoff and continue to grow our balance sheet loan book with high-quality multifamily bridge loans that generate attractive levered returns and create a substantial pipeline of future GSE agency originations volume and long-dated servicing revenues. We are very pleased with the high-quality balance sheet we have created that is also financed with the appropriate liability structures. Our balance sheet loan book has grown to $5.1 billion and is financed with $3.4 billion of debt. Approximately $2.5 billion or 75% of that debt is non-recourse non-mark-to-market CLOs, and approximately $900 million is financed through warehouse and repurchase facilities that are secured by $1.2 billion in assets with eight different banks that we have longstanding relationships with. Additionally, the majority of the loans being financed in these bank lines are also rated and CLO-eligible, greatly mitigating the risk of financing these loans through short-term facilities. It is also very important to highlight that over 90% of our book are senior bridge loans, and more importantly, 80% of our portfolio is multifamily assets, which has been the most resilient asset class in all cycles and continues to significantly outperform all other asset classes in this recession as well. We have had tremendous performance of our multifamily portfolio, with well over 99% collections and no loan modifications with great concessions today. Most of the loans in our portfolio contained interest reserves and annual replenishment obligations by our borrowers, giving us the ability to effectively manage our portfolio through this dislocation. As a reminder, we have very little exposure to the asset classes that have been affected the most by this recession, such as retail and hospitality. Our total exposure to these asset classes is approximately $175 million or approximately 3% of our portfolio. We also believe we have adequately reserved for these assets and do not feel at this point that any material further impairment will be necessary, which gives us confidence that our adjusted book value of $9.74 accurately reflects the current impact of the recession. We continue to see very positive trends related to our GSE agency business collections, which we believe reflects the strength of our borrowers and the quality of our GSE agency portfolio. We only have a handful of delinquent loans outstanding and extremely low forbearance numbers in our portfolio through October. Loans in forbearance represent less than 0.4% of our $16.5 billion Fannie Mae book and around 6% of our $5 billion Freddie Mac loan book, which is unchanged since July, and we have had very few requests for forbearance in the last several months. As a result of these extremely low forbearance numbers, we have recovered almost all of the $700,000 of servicing advances that we had outstanding last quarter, and currently, we have less than $20,000 unrecovered servicing advances. In summary, we are extremely pleased to have built such a versatile operating platform that is multifamily-centric, with many significant diversified income streams that continue to produce strong core earnings and dividends in all cycles. We are also well-positioned to succeed in the current economic climate and are excited about the many opportunities we see to continue to grow our franchise, core earnings, and dividends going forward. We believe this puts us in a class by ourselves and our performance and track record speak for themselves. We believe that an investment in our company today at these levels would provide a tremendous long-term return, and our primary focus remains on continuing to maximize shareholder value. I will now turn the call over to Paul to take you through the financial results.

Paul Elenio, Chief Financial Officer

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 nine 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 give 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. 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 the 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 last quarter largely due to the significant core earnings we generated in the third quarter. As Ivan mentioned earlier, we are not expecting any material additional write-downs at this point, giving us confidence in our adjusted book value. Looking at our results from our GSE agency business in the third quarter, we generated $17 million of core earnings and approximately $1.5 billion in originations and $1.2 billion in loan sales. The margin on our third quarter GSE agency loan sales was up to 1.63% compared to 1.46% for the second quarter, mainly due to stronger margins in our Fannie Mae business and a higher mix of FHA loans during the quarter, which is a higher margin business. As Ivan mentioned, we also have a very robust pipeline, and we expect to produce very strong origination volumes for the balance of the year. In the third quarter, we recorded $42 million of mortgage servicing rights income related to $1.5 billion of committed loans, representing an average MSR rate of around 2.77%, which was up slightly from the 2.69% rate for the second quarter. Our servicing portfolio grew 4.5% this quarter to $22.6 billion at September 30 with a weighted average servicing fee of 44.8 basis points and an estimated remaining life of 9 years. This portfolio will continue to generate a predictable annuity of income going forward of around $101 million gross annually, which is up approximately $14 million on an annual basis from the same time last year. Additionally, prepayment fees related to certain loans under yield maintenance provisions, were $2 million for the third quarter compared to $3 million for the second quarter. In our balance sheet lending operation, we grew our portfolio to $5.1 billion in the third quarter, with $292 million in new originations. The $5.1 billion investment portfolio had an all-in yield of 5.93% at September 30 compared to 6.10% at June 30, mainly due to higher rates on runoff as compared to new originations during the quarter and from the impact of non-performing loans. The average balance in our core investments was up to $5 billion this quarter from $4.8 billion last quarter mainly due to the full effect of our second quarter growth. The average yield on these investments was 5.98% for the third quarter compared to 6.16% for the second quarter, mainly due to more acceleration and fees from early runoff in the second quarter, higher interest rates on runoff as compared to originations, and from the impact of non-performing loans. The total debt on our core assets is approximately $4.5 billion at September 30, at an all-in debt cost of approximately 3.09% compared to a debt cost of around 3.14% at June 30. The average balance in our debt facilities was up slightly to approximately $4.6 billion for the third quarter from $4.5 billion for the second quarter, mostly due to financing the growth in our portfolio while the average cost of funds in our debt facilities decreased to approximately 3.06% for the third quarter compared to 3.26% for the second quarter due to a decrease in the average LIBOR rates during the third quarter. Overall, net interest spreads in our core assets increased slightly to 2.92% this quarter compared to 2.90% last quarter, and our overall spot net interest spread was down to 2.84% at September 30 compared to 2.96% at June 30. Lastly, the average leverage ratio on our core lending assets, including the trust preferred and perpetual preferred stock as equity, was down slightly to 86% in the third quarter from 87% in the second quarter, and our overall debt to equity ratios on a spot basis came down as well to 3.0% to 1% at September 30 from 3.1% to 1% at June 30, excluding general CECL reserves. That completes our prepared remarks this morning. I will now turn it back to the operator to take any questions you may have at this time.

Operator, Operator

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

Steve DeLaney, Analyst

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.

Ivan Kaufman, President and Chief Executive Officer

Thanks.

Steve DeLaney, Analyst

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 a little more subtle in that 163? I am looking at our model for 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 an important number?

Paul Elenio, Chief Financial Officer

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 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. There are a lot of different factors that go into the margin, but the margin has been very robust on the Fannie product as well.

Steve DeLaney, Analyst

That’s helpful color. Sure, Ivan.

Ivan Kaufman, President and Chief Executive Officer

Steve, I will just add a little bit of 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 a 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.

Steve DeLaney, Analyst

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 IPOs 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?

Ivan Kaufman, President and Chief Executive Officer

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 Fannie Mae loan book, if people do exit a little earlier, we do get a pick up on some of the yield maintenance, which increases revenue going forward. 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 yet occur, but it’s possible there may be a little bit of an uptick on that side.

Paul Elenio, Chief Financial Officer

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 refinances of 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.

Ivan Kaufman, President and Chief Executive Officer

Yes. Just a little color on that as well; we are seeing longer duration products, so there were a 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 the 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.

Steve DeLaney, Analyst

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

Ivan Kaufman, President and Chief Executive Officer

Thanks, Steve.

Operator, Operator

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

Jade Rahmani, Analyst

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, a 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?

Ivan Kaufman, President and Chief Executive Officer

Yes. I mean, clearly, the rent collections are remarkably impressive. 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, and 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 gives us 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 our 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 are not being released, and there are a 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.

Jade Rahmani, Analyst

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

Ivan Kaufman, President and Chief Executive Officer

So, they have different policies, and 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 because of small balance orientation. 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. They gave us as a servicer the ability to really make the evaluation as to whether the bars were affected and then apply good business judgment as to whether they needed help or not, whereas Freddie was more waiving it in. I think they have altered that philosophy a little bit. I think you are seeing a lot more forbearance on Freddie Mac’s more balanced business. We are, as you know, one of the leading originators in that space and are very active in that space, and even there we are seeing probably half of the forbearances that the rest of the industry is saying.

Jade Rahmani, Analyst

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?

Ivan Kaufman, President and Chief Executive Officer

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 is that 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 are 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.

Jade Rahmani, Analyst

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 like something that would really play and see Arbor’s wheelhouse here?

Ivan Kaufman, President and Chief Executive Officer

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 in 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. 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. Once those loans become those projects, they will be under putting a bridge on it. Then after the bridge, we end up putting a permanent loan on it, hopefully through the agencies if they qualify. We love that business, we are putting a lot of effort and a lot of technology into that space. I think we are going to really see the benefit in the end, maybe in the fourth quarter of this year, and that is certainly going to carry through very strongly into next year.

Jade Rahmani, Analyst

Thanks for taking the questions.

Ivan Kaufman, President and Chief Executive Officer

Thank you, Jade.

Operator, Operator

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

Stephen Laws, Analyst

Hi, good morning. Ivan, you commented on the strong volumes you expect to continue in Q4. Is this $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?

Ivan Kaufman, President and Chief Executive Officer

So, I think Paul gave a little comment about how volume we are up around 11% year to date. He expects us to be approximately 20% and maybe as much as 30% for the year. That indicates you that we are going to have an even stronger fourth quarter. 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. We are closing more than we have ever done historically. The best news for us is that as we are closing so many loans, our pipeline is still staying at the same level. In the current environment, we are very, very optimistic. We just hope it continues. The numbers are just extraordinarily strong for us right now, and the pipeline is strong. 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.

Stephen Laws, Analyst

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?

Paul Elenio, Chief Financial Officer

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. The second aspect is the industry as a whole. We have seen the real benefit from this; our servicing fees on our new Fannie Mae loans have been very, very strong. We have been getting 60 to 70 basis points on new Fannie Mae loans that we have put on as servicing. How long will that continue? Will depend 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.

Stephen Laws, Analyst

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?

Ivan Kaufman, President and Chief Executive Officer

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.

Stephen Laws, Analyst

Great. Appreciate you taking my questions this morning.

Ivan Kaufman, President and Chief Executive Officer

Thanks, Stephen.

Operator, Operator

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.

Unidentified Analyst, Analyst

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?

Ivan Kaufman, President and Chief Executive Officer

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. On the APL side, you are at least 50, maybe 75 basis points wide of that. We don’t see that as something that we are going to be able to do in large scale. Our net securitization if we were going to do, we’ll probably be in 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.

Unidentified Analyst, Analyst

Appreciate the color, Ivan. Thanks.

Operator, Operator

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

Ivan Kaufman, President and Chief Executive Officer

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. I am very optimistic about our pipeline, our balance sheet, and our performance looking forward to a great fourth quarter in the conclusion of a fantastic year and some very, very difficult times. So, everybody, stay healthy and stay tuned. Have a great day. Bye-bye.

Operator, Operator

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