Good afternoon, and welcome to Ladder Capital Corp's earnings call for the third quarter of 2022. As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter ended September 30, 2022. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance.
The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our supplemental presentation, which is available in the investor relations section of our website. At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack.
Thank you, and good evening, everyone. For the third quarter of 2022, Ladder generated distributable earnings of $34.3 million, or $0.27 per share. In September, following continued earnings and portfolio growth, we increased our quarterly dividend for the second straight quarter to $0.23 per share, representing a 15% increase to date this year. Our dividend was well-covered by distributable earnings. The 9.1% ROE we generated this quarter was driven primarily by strong net interest margin and rental income. As of September 30, our adjusted leverage ratio was only 1.8 times, and our undepreciated book value increased to $13.63 per share. As an internally managed company with high insider ownership, we run an inherently conservative and simple business that is primarily focused on senior secured assets and exclusively focused on domestic commercial real estate.
Management and the board continue to own over 10% of the company, which we believe should give a lot of confidence to our fellow shareholders and partners, perhaps now more than ever. In the third quarter, we originated $159 million of balance sheet loans, 86% of which were either multi-family or manufactured housing, with our multi-family originations focused on newly constructed properties. As of September thirtieth, our balance sheet loan portfolio had a weighted average loan to value of 68%, and the portfolio is primarily comprised of lightly transitional middle-market loans with an average loan size of $25 million. We continue to believe that the granularity and diversity of our positions with limited exposure to any single sponsor, market, or asset serves as a credit enhancement to our portfolio. We experienced strong credit performance and loan repayments over the past several quarters.
Consequently, 82% of our balance sheet loan portfolio is now comprised of post-COVID loans, which were made on a conservatively reset valuation with newly capitalized business plans and ample reserves in place. Our real estate equity portfolio continues to contribute meaningfully to distributable earnings, not only from gains realized on periodic sales of assets at significant premiums to undepreciated book value, but also by generating strong and reliable net rental income that contributed to our distributable earnings every quarter. The portfolio is primarily comprised of necessity-based net lease properties under long-term leases to investment-grade tenants. These properties are financed with long-term, non-recourse, non-mark-to-market debt or held unencumbered. Our securities portfolio ended the quarter with a balance of $611 million and remains principally comprised of short-dated AAA-rated securities.
On the asset and liability front, we maintain a strong balance sheet with modest leverage and a high degree of financial flexibility afforded by our differentiated liability structure and large, high-quality unencumbered asset pool. Approximately 50% of our assets are fully unencumbered, and 75% of these assets are comprised of cash and senior secured first mortgage loans. Equity, unsecured bonds, and non-recourse, non-mark-to-market debt make up 84% of our capital structure. Also, as previously reported in the third quarter, and despite volatile market conditions and tightening credit standards, we successfully extended upside and reduced the cost of our revolving credit facility with our 9-bank syndicate. Our facility does not require a dedicated borrowing base, unlike most other revolving credit facilities in our sector, which we believe is a testament to the strength of our corporate credit, conservative reputation, and market-leading credit rating.
100% of our bank group participated in this timely and important facility improvement, which now provides Ladder with $324 million of same-day funding for the next five years at a reduced rate of SOFR plus 250. In conclusion, following our robust pace of originations over the past 18 months, our distributable earnings are now comfortably covering our current quarterly dividend. We also remain positively correlated to rising rates. While all of this enables us to remain highly selective in further incremental capital deployment, our strong balance sheet and ample liquidity leaves us well positioned to take advantage of the opportunities we expect will present as a result of any dislocation in our space.
As a reminder, Ladder was formed in 2008 at the height of the financial crisis and was built for precisely the type of disrupted financial market conditions we are currently experiencing. With that, I'll turn the call over to Paul.
Thank you, Pamela. As discussed in the third quarter, Ladder generated distributable earnings of $34.3 million or $0.27 per share.
Our three segments continued to perform well during the third quarter. Our $4 billion balance sheet loan portfolio is primarily floating rate and diverse in terms of collateral and geography. As Pamela discussed, 82% of the portfolio is made up of 2021 and 2022 vintage loans. Our net interest margin continues to rise from increase in rates, which is enhanced by our liability structure, of which over 50% is fixed rate and anchored by $1.6 billion of unsecured corporate bonds with our nearest maturity in October 2025. Our unsecured bonds have an overall weighted average maturity of approximately five years and a weighted average coupon of approximately 4.7%. During the third quarter, balance sheet loan origination and funding was $182 million. As Pamela discussed, we're primarily focused on multifamily and manufactured housing assets.
We received loan payoff proceeds of $170 million during the period and an additional $78 million subsequent to quarter end. Our $1 billion real estate portfolio also continues to perform well, providing stable net operating income and includes 157 net lease properties, representing approximately two-thirds of the segments. Our net lease tenants are strong credits, primarily investment grade rated and committed to long-term leases with an average remaining lease term of 10 years. During the third quarter, we sold one net lease property, which generated a $2 million gain, representing a 27% premium to undepreciated book value. As of September 30, the carrying value of our securities portfolio was $611 million. The portfolio is 86% AAA rated, 99% investment grade rated with a weighted average duration of approximately 1 year.
Our assets are complemented by a best-in-class capital structure that remains anchored by a conservative combination of unsecured corporate bonds, non-recourse CLOs, and mortgage debt with a corporate credit rating one notch from investment grade from two of the three rating agencies. As of September thirtieth, we had over $750 million of total liquidity, and our adjusted leverage ratio stood at 1.8 times. This liquidity is in addition to the undrawn capacity available to our seven committed loan warehouse facilities, which as of September thirtieth, were only 42% utilized out of $1.3 billion of committed capacity. We were pleased with the upsize cost reduction and extension of our revolving credit facility in July.
The facility was extended for five years to July 2027 and upsized 22% to $324 million, and the interest rate was reduced to SOFR plus 250 basis points, with further reductions upon achievement of investment grade rating. We believe the combination of $750 million of liquidity, along with our large pool of unencumbered assets, provides Ladder with strong financial flexibility. As of September 30th, our unencumbered asset pool stood at $2.8 billion, 75% of which was comprised of first mortgage loans and cash. During the third quarter, we repurchased 2.6 million of our common stock at a weighted average price of $9.85. Year to date, we have repurchased 7.3 million of stock at a weighted average price of $10.09.
As previously reported in the third quarter, our board of directors increased the authorization level of our share buyback program to $50 million. Our undepreciated book value per share was $13.63 at quarter end, based on 126.6 million shares outstanding as of September 30. Finally, as Pamela discussed in the third quarter, we declared a $0.23 per share dividend, a 5% increase from prior quarter's dividend, which was paid on October 17. This dividend raise plus the prior quarter's dividend increase represented a 15% increase to our regular quarterly cash dividend so far this year. For more details on our third quarter operating results, please refer to our earnings supplement, which is available on our website, as well as our 10-Q, which we expect to file tomorrow. With that, I will turn the call over to Brian.
Thanks, Paul. The third quarter was a rather smooth quarter. Back in the first quarter of this year, I indicated to you that we were in a very good position to allow the Fed to do some of the work for us in the interest income column. I pointed out that we were poised to benefit from expected hikes in short-term interest rates as the Fed would soon be forced into raising the Fed funds rate into a slowing economy. Today, we are seeing that scenario play out, and we are indeed benefiting from our earlier preparation for current market conditions. One example that clearly illustrates our positive correlation to higher short-term rates is seen in a comparison of our top line interest income versus our interest cost over the last 12 months.
In the third quarter of 2022, we earned $77.4 million in interest income compared to $46.2 million in the third quarter of 2021. That is to be expected in a rising rate environment when most of our assets are floating rate instruments. What may be unexpected, though, is that our interest expense in the third quarter of 2022 of $48.5 million actually went down from the interest expense from a year ago of $49.3 million. This happened in large part because of our differentiated liability structure that provides us with a very comfortable and diversified funding model, where we have 38% of our debt outstanding in unsecured corporate notes at a fixed average interest rate of 4.66% with an average maturity of five years from now.
This $1.6 billion of corporate debt dampens the cost of rising short-term interest rates. We believe the use of corporate unsecured debt to fund a large part of our business is the safest way to manage through economic cycles, and it enables us to have over $2.8 billion of unencumbered assets on our balance sheet at the end of the quarter. We also benefited by having 25% of our liabilities in non-recourse matched term financing via the commercial real estate CLO issuance from 2021, with managed periods that will be open on average for about 10 more months before the loan pools become static.
I'd also like to point out that while we have seen a rather dramatic increase in short-term rates this year, so far the prevailing tighter financial market conditions are manifesting themselves in the form of lower than anticipated equity returns. In most normally functioning markets, rising rates will cause less demand for new loans as the refi channel for new loans slows. This in turn causes a lack of supply in the mortgage-backed securities market, and credit spreads tend to tighten as rates rise and supply dwindles. In today's market, we're seeing an odd scenario where interest rates are rising and credit spreads are widening at the same time.
While new loan production has slowed as expected, the Fed's quantitative tightening program of selling billions of dollars of their mortgage-backed securities holdings each month is creating an unnatural supply that is causing deterioration in valuations of outstanding securities, leading to wider credit spreads. This is also making it difficult for borrowers to refinance their loans at maturity. Fortunately, because we diversify our loan portfolio with a middle market by choice model, our smaller average loan size is more manageable for upcoming refinance or sale requirements. Further, because we own a loan portfolio where over 80% of our loans were originated after the pandemic, only about 7% of our loans will hit their final maturity dates before 2024 begins. We also benefit from the protection provided by interest rate caps being in place for all of our floating rate loans.
Because we believe that the Fed will probably be near the end of its aggressive tightening by the middle of 2023, we think our maturity schedule should fit nicely into a much more welcoming lending market after 2023. Until then, we will benefit from the increased income that results from future additional rate hikes the Fed is forecasting into 2023. We also benefit from carrying relatively low levels of debt. Since our quarterly cash dividend is covered by net interest income and net operating income from our real estate portfolio, we can be very selective about the loans that we make. As we look ahead, higher rates and the strong dollar are raising the anxiety levels in capital markets today. These high stress levels usually produce outsized opportunities for those who can provide liquidity.
With plenty of dry powder available, we plan on taking full, yet careful advantage of these unique situations. I'll now turn the call over to Q&A.
Thank you, Brian. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. The first question we have is from Ricardo Chinchilla from Deutsche Bank. Please go ahead.
Hey, guys. This is q uestion.
Just as you mentioned in your final comments, you envision a lot of opportunities in the short term. How do you balance investment in short-term opportunity versus liquidity in terms of, you know, you have $750 million? Do you guys feel that, you know, you could reduce that in order to pursue further deals or further opportunities? What do you guys believe would be the minimum liquidity or maximum leverage that you would be willing to take the portfolio to make the most out of these opportunities given your current outlook?
I think the way we're looking at it is liquidity is difficult right now. As I shouldn't say liquidity at Ladder, but just refinancing loans is difficult, as you've seen, you know, across the board from a few other people. But I think with the presence of the revolver of $324 million, I don't feel overly concerned about using the capital that we've got on our balance sheet. As I indicated, we don't have much coming due at all for the rest of this year as well as all of next year. We don't anticipate being repaid on loans quickly, nor do we need to be repaid quickly in order to fund our future advances that we've got in some of our loans
Keep in mind, not only do we have quite a bit of liquidity in the cash securities and revolver portion of our balance sheet, but we also own, you know, other things that are pretty liquid also, as well as unencumbered real estate, which we could. I think we've even got commitments on our repo lines that we have not drawn. As far as how low to go, I don't anticipate we're gonna use the revolver. But if we did, in these times, I think investments that we make will not require much leverage unless it's a AAA or AA security. My guess is, we'll probably be pretty comfortable with $100 million-$150 million of just walk-around cash and revolver.
We don't feel like there's anything pressing us in the near term here.
Perfect. That's very helpful. Thank you so much.
Sure.
Thank you. The next question we have is from Christopher Muller from JMP Securities.
Thanks for taking the question, and congrats on another nice quarter. You guys have talked about your multi-cylinder approach in the past. Given the slower economic picture today, do you see the allocation of capital deployment changing over the coming quarters within that multi-cylinder approach?
Without giving specific direction on any given day, it's intuitive to me that rates are causing cap rates to widen. In addition to that, rising spreads accompanied by rising rates are causing less demand in the loan portfolio. I know for quarter after quarter, we've been beating the drum saying we think the best thing we can be doing right now is making bridge loans. We focused on multifamily primarily since last October, I would say. The reality is we've been doing this long enough to know that as rates go higher and spreads continue to widen, and that'll continue until the Fed stops selling mortgage-backed securities. I would anticipate we'll probably start adding real estate here. We have not really been a mezzanine lender in any significant manner.
I've said a few times, if interest rates are 3% and you need a mezzanine loan, you're probably over-leveraged. I do believe that there's gonna be a lot of quality situations coming up on maturity dates with banks that are not gonna be very patient, and also CLO originators that are gonna be looking to get paid off. We might even fill in a mezzanine column also. Again, whatever demands the capital markets need and are safe and frankly high rate, you'll probably see us there. I would anticipate. You've seen us selling some real estate over the last few quarters, over the last year or so. I suspect we'll slow there, but I suspect we'll start buying some more as the next year goes by.
Got it. That's helpful. Just to clarify on the cash balances. It looks like it ticked up in the quarter for the first time in a couple of quarters now. Is there anything to read into that, or is that kind of just the dynamics of the balance sheet?
No, that was really just the timing. We received some payoff proceeds during the quarter, and it was really just a timing thing.
That's helpful. Thanks for taking the questions.
Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have is from Jade Rahmani from KBW.
Thank you very much. Are you anticipating widespread distress this cycle, this downturn, or do you still stand by the view that this is going to be sort of a moderate recession? Seems like the views are changing there for this to potentially be a severe recession.
I don't necessarily think I would link a severe recession with stress in the lending markets for borrowers that have rates that are too high. You know, the unemployment number is pretty strong so far. I think overall we saw the GDP, consumers in pretty good shape. No, I don't believe we're taking a view that this is gonna be a severe recession. The reason why is because it's pretty clear the Fed has mandated this recession. This didn't just happen through a normal business cycle. I suspect at some point, the Fed, despite their protestation in saying that they're going to stamp out inflation at all costs, I suspect the first blink you'll see from them will be them slowing their mortgage-backed securities sales.
I think the second blink you'll hear from them is that maybe 2% is not necessary. Maybe 4% is okay for the next couple of years because it's getting very expensive. They're losing a fortune selling their mortgage-backed securities into markets like this. I think that they have indicated there will be pain. Take a quick look at eight big stocks on the Nasdaq and, you know, the losses associated with them. The pain is there. I still maintain that the consumer went into this recession in pretty good shape. Having said that, the bottom quartile of the United States economic ladder is not in good shape at all.
Those are the people that are living paycheck to paycheck in rental housing, and they're very impacted, you know, by cost of automobiles and cost of financing of automobiles and credit cards. I think it's unfortunately gonna be a split decision really on how bad the recession is. I think the bottom of the economic ladder will feel it and are feeling it right now. A lot will depend really on what happens in this midterm election. I still don't think that, you know, just housing prices dropping 15% or 20% from the highs, that would still put them up about 30%, in the prior year and a half. I don't. I still don't think it's gonna be all that bad.
Thanks for that. In terms of investment grade, sounds like there might have been some steps in the right direction there, or is that not? Am I not reading that correctly in terms of interpreting your comments?
Oh, no, I don't. I wasn't making any comments relating to that. I think that yeah, rates are high right now. I think if you're borrowing money in the unsecured bond markets, be it investment grade or high yield, you're borrowing because you have to be, and not because you wanna be. I don't see that any time in the near future because one, we don't need the capital, two, it's too expensive and you know, there are cheaper sources of funding now on the secured side. Again, we run relatively low leverage. That is a part and parcel with what goes into becoming IG. We'll probably just remain there anyway because we're able to attain very attractive yields without using a lot of leverage right now.
This is a tremendous opportunity set for us.
Thank you very much for taking the questions.
Sure.
The next question we have is from Richard Gross from Columbia Threadneedle Investments.
Hey, guys. I had a somewhat similar question, but a little derivative on it. Can you just share some insights on how you think about? You just talked about the unsecured bond market being relatively expensive and that making sense today. I'm guessing you're also kinda looking at, you know, what is cost of funding there, what is cost of funding on the CLO secured side, and then what is the asset spread on the loans you're making. Could you maybe give us some insights in terms of what that delta looks like? You know, if we stay in an environment of higher rates, you know, at what point would it maybe make sense to come to the unsecured market?
I think what I'll do is I'll just give you what I think rates are as opposed to the deltas, because if I start doing math quickly here, I'll screw it up. You know, we're writing loans now, I would say on the low side on the rates. You know, we've lowered our LTVs across the board and, you know, sponsors understand that. There isn't a lot of demand because, you know, they know also that rates are quite high and, there's not a lot of liquidity. Right now in the bridge loan market, the CLO market is driving spreads wider. Insurance companies and banks were filling that gap. They're not filling that gap quite as effectively anymore. I think the regulators are in the banks telling them to, you know, maybe not add so much additional exposure.
You know, you can be very picky. We're not a very big company. We write $25 million-$200 million loans. On the low side of rates right now, we're about 7%. We did sign an application this week at 15%. It would not be at all shocking to see a few loans that we close with double-digit rates along with points. Of course, we would not be entering any secondary markets to try to finance those at this time because those are very acceptable returns. We could probably drive very high rates in the mezzanine space, but you know, very high rates oftentimes lead to defaults. You know, I think we'll be very, very cautious around that.
7% is the low side, probably 8.25, 8.5 is comfortable on, you know, we can underwrite a 70 LTV there. Most property types are doing okay with the jury's out on office. Office has 9 variations, class A, B, or C. What city is it in? Is there a lot of crime in the city? Is it work from home? You know, there's too many varieties to go into here, but that's probably the product type that's most sensitive right now. The reason why really is they had two years where they couldn't really lease the buildings. As the economy opened and they began to start leasing, the Fed charged in and started raising rates.
It's time for them to re-up their loans and refill their interest reserves. That's causing a little bit of stress in the system. Hotels are doing very well with the exception of business hotels in big cities with a lot of crime. You can comfortably write loans, I think, on hotels at relatively low LTVs. The point here I'm making is this is the way we generally lend, and we're at a point where we can charge rates that are high enough that it won't break the assets back. But in addition to that, we really won't need to lever them too much to maintain our dividend or push it higher.
We're not going to try to redline the organization, try to make as much money as possible and take a lot of risk. Yeah, that would be a little bit crazy, so. We do see lots of opportunities, borrowers who have to do things where. What we're particularly happy with is because of 10 years of low interest rates, many of these borrowers have ample reserves, and they can write checks for $3 million, $4 million, $5 million to deleverage their position and give themselves more time. The Fed said it was gonna be painful.
It is beginning to show up, and I happen to think the Fed will. They're already breaking things in commercial real estate, and I think they're probably gonna back off and see what the long-term nature of there already, you know, the prior moves they've made, what does it mean? I think we're gonna enjoy higher rates probably. When I say enjoy, I'm talking about a ladder, not necessarily if you're a borrower. I think that through 2023 they'll stay reasonably flat, and they're gonna be relatively high because I think there's another 125 coming between here and New Year's. We should do very well in that environment because of the way we're structured on the liability side. I don't know if that answered you. Oh, by the way, I'm.
I think that mostly answers it. It sounds like it's much more interesting to make loans than to, for instance, allocate capital to repurchasing any of your bonds like you have in the past. I'm also guessing, you guys said maybe in January, you talked about maybe issuing unsecured, and I think that sounds like it's probably off the t able for the, you know, for the immediate future.
Yeah. At current rates, I think that is probably off the table because we have plenty of capital. Frankly, there's just not a lot of demand on the loan side. The security side is very attractive right now too, but it does require leverage in order to hit. You know, a AAA CLO right now, you can lever those to 24%-25% returns. Plenty of room in that world. I think that's probably where that'll stop. I don't think they get much wider here. Yeah, I think we have been a buyer of our stock. We have been a buyer of our bonds as recently as last quarter.
If we have excess cash around and there's not a lot of demand for it, we will step right into both of those instruments. That we are not at all concerned about having capital that's coming due in seven years. If the price gets cheap enough and we can't find a better investment, we will take it off the market.
Okay. Thank you for your comments.
Thank you.
The next question we have is from Matthew Howlett from B. Riley.
Oh, hey everybody. Thanks for taking my question. You know, to go back to the slide 14 again, you know, the last few quarters have been asking the same thing. When you look at the interest sensitivity, it's just impressive. With the 200 bps to the $0.44 and the 200 bps, and that's as of 9:30. I guess just my obvious question is, it looks like the Fed is going to stop around either 4.5% or 5%. It's up clearly 200 from where LIBOR was at 9:30. What can you tell us in terms of, you know, NII guidance if the Fed does go to these levels that the market's predicting now?
I think this is Paul. Our top line, 89% of our loan book is floating rate. 90% of our securities book is floating rate. That should steadily increase as these rates cement into our interest income. All the while our liability structure with half of it being fixed, you know, our interest expense line item goes up less.
Well.
Yeah.
Look, your balance sheet is in terrific shape. I think you're just an outlier relative to peers to have this. I guess just the second obvious question is, I mean, would you take the dividend up to $0.35? I mean, what would you know, a quarterly dividend. I mean, how inclined are you to just keep raising it, you know, given where NII is tracking?
We're certainly not going to communicate a dividend policy here, that's for the boardroom, which comes up. We are shareholder friendly. We try to raise our dividend when we can. I think another 100 basis points of rate from the Fed, if it translates into LIBOR or SOFR, which it should, that's probably $0.16 a year, so $0.04 a quarter. We're already covering our dividends through just real estate and loans. As long as the credit is holding up and.
On the other hand, we are seeing an environment right now that we think our shareholders would love to see us investing money right now because the ROEs we're gonna generate on recent investments as well as new ones will far exceed the ROE associated with buying stock back or just raising a dividend. It's never one or the other. It's always all of them together. You know, we have raised our dividend 15% this year and yeah, I don't know if we'll do it again in December. We might, though. This all depends on the backdrop of how and not just how the credit is performing, but also what borrowers are saying to us.
We are not at all shy about pushing dollars into the dividend column, the stock buyback column or the bond buyback column. They're all very attractive right now. You know, there are numerous investments in the market right now that are even better, but that doesn't mean we wouldn't touch them. I don't want to imply that we have no interest at all in those. We do. We're very interested in them. I know as large shareholders ourselves, I always like saying we're a large shareholder, but so is Mark Zuckerberg. I'm a little concerned we don't go too far with that conversation. You know, we are running the company very safely right now with low leverage, with a lot of attractive opportunities ahead of us.
If for some reason we see opportunity that we just can't transact for some reason because it just moves too far too fast and the economy really does go into a downturn, yeah, we'd probably get a little slow on capital outflows. We don't see that right now at all. We set this company up. We've been saying it quarter after quarter, if rates go up, we make more money. If rates have gone up, we're making more money. We expect them to keep going up. We'll keep making more money. We've built a mousetrap that does very well as the Fed is raising rates into a slowing economy. Of course, we're going to share that with our shareholders, either through dividends, stock buybacks, or superior investments.
I just want to add when Brian says we're covering our dividends through real estate and loans, he means net rental income, because that's something I just think people overlook when they talk about our real estate portfolio and the lumpiness of the gains on sale, which, you know, we think we've demonstrated pretty consistently. When he refers to real estate, it's net rental income, which is. I tried to make that point in my comments, because I do think people overlook the component of that contributes to our distributable earnings every quarter.
No, I get big picture sometimes. I'm just talking cash flows
No, look, it's part of the portfolio that I think is overlooked by investors. It doesn't seem like, you know, you trade well below your undepreciated book. You know, it's clearly something that I think being overlooked. With that said, I heard you at the CLOs, their reinvestment periods don't end, you said for 12 months, the two yet outstanding?
Yeah, we've got two out. I think one ends in June or July, and the other is in December or January of next year.
Great. Okay. Great. The last question, you touched on a little bit just on the general office, you know, sector. What's your take? Is this just a you know, New York, Philly, Seattle, LA issue? Do you just see major distress, you know, conversions into you know, rentals? What. Just your take, and when would you get involved? Are people gonna be back to the office 'cause of a recession? Is that gonna cause. I mean, just go a little bit your thoughts. As always, appreciate hearing.
Sure. First of all, I thought after Labor Day, we would get a quick read on what the story was gonna be about work from home versus work in return to office. It is clear that it may be because of the slowdown in the economy that's going on, but the back to office move is winning.
Mm-hmm
At least as far as I can tell. In New York, it certainly is winning. I don't think it's coming back Monday to Friday. I think Friday is gonna be, you know, a day where, you know, people will probably work from home. That's not gonna affect the office market too much in any city, really. What it will affect is the restaurants and the pizza places and the bagel stores because 20%, and that's not a normal day, Friday. That's the day where they make a lot of money. I think that they're gonna feel it a little unnaturally. Realistically, in order to carry office products now, in order to own it's gonna be more expensive. Office buildings are worth less now than they were last year, generally.
They're not in free fall, and I think the difficulty, which I think you'll probably see this year, and I think you're beginning to see the beginnings of it, is if you're in a floating rate loan on an office building from 2018 or 2019, you know, you bought a building, you thought you were gonna refurbish it and re-tenant it. You had some interest reserves that you thought were adequate for a couple of years while interest rates were low. Because of the pandemic, the first blow that hit you was, you know, you couldn't really lease your buildings, because no one was even going to work. You had to keep paying your interest. Your interest reserves ran out. Your lender was tolerant.
If you made a payment to him, you know, he gave you a little more time. What happened in a lot of these bridge loans is, by definition, they're transitional. They have gotten them leased partially. Very few of them are empty. A lot of the rehab work got done, and they got tenants in for 50, 60, 70% of the buildings. If you're not finished at this point, and most of these loans require a debt yield test, and at 60% occupancy after three or four years, you're not meeting that test. You don't have the option available.
In addition to that, if you do have to extend the loan, you're gonna have to buy a LIBOR cap or a SOFR cap, which is much more expensive now in addition to the actual rate you'll be paying. The delay in ability to work on your office buildings hurt for two years. As the economy opened up, it got better, and I think that there was this hesitation on, you know, are people really gonna go back to the office? As that question gets answered, and it's mostly yes, but not completely yes, you're now being asked to re-up even though you're three-quarters of the way through your project, and it's now costing a lot.
You can anticipate coming out in a year from now, if you do pay your debt down and pay your higher rate, you're gonna have a higher cap rate anyway. I do believe you're gonna see some office buildings change hands here. I think it's mostly because of the technicality that took place on the delay on the office relative to hotel and apartments. I don't think you're gonna see incredible bargains in office because I think in another year, they're gonna be doing a lot better. That said, San Francisco, I have serious concerns about that city in the long term. People are leaving it, and there's sublease space available.
A lot of the sublease tenants that are in these buildings are expiring soon. Until they get a couple of items under control there, I just don't see that one settling down in the near term, which again, is why I think the midterm elections are gonna impact this story a little bit. We'll see. New York seems to be doing better, and seems to be trying to address some of the social problems that exist. Chicago is trying to address its problems. It's not doing very well. Philadelphia is not in great shape. Los Angeles has issues, for sure. None of these are insurmountable right now.
You're beginning to see the pendulum swing the other way, away from the social experiment of, you know, no cash bail and, you know, just put people back on the street. It's kind of amazing when you read an article about an arrest that's been made and you read the history on the guy they arrested, and he's been arrested three or four times, you know, in the last few months. I think if they get that under control, they'll be fine. I don't think this is lost yet. It is gonna be difficult if they don't make people feel safer in these cities.
I really appreciate all the color. Thanks, everyone. Thanks, Brian.
Yep.
Thank you. Next question we have is from Ethan Saghi from BTIG.
Hey, thanks for taking my question. I'm on for Eric Hagen tonight. Can you touch on your CECL reserve and how sensitive it'll be to interest rates going forward?
Yeah. This is Paul. I wouldn't say it's necessarily sensitive to interest rates. We did tick it up from 37 basis points to 41 basis points, but that was more just due to the macro backdrop.
Yeah, I would just add here too, this is a bit of a nuanced answer. If interest rates are going up because growth is strong and employment is ripping and people's salaries are going through the roof, that's okay. That's not gonna create a lot of CECL reserves. If interest rates are going up because of inflation while growth is slowing, as it seems to be now, the word stagflation begins to enter the picture. Unfortunately, it looks like that to me. We will respond to the overall economy in the CECL reserve, but interest rates rising may or may not cause us to think that the economy is deteriorating.
Got it. All right. That's it for me. Thank you. Mm-hmm.
Thank you. Ladies and gentlemen, just a final reminder. If you would like to ask a question, please press star and then one now. We have a follow-up question from Jade Rahmani.
Thanks. Just wondering, was there any change in credit performance during the quarter?
No.
Great. Thanks.
Okay. Thank you.
Thank you, sir. At this stage, there are no further questions. I would like to turn the floor back over to Brian Harris for closing comments.
I just want to thank everybody for paying attention during the year as well as today. I know it'll be a little bit longer between now and the next time we talk. You know, we appreciate the time and attention you've given and following our company. Hopefully, we've been transparent in conveying to you know, the strength of the organization and how far it's come. Other than that, I'll just say Happy New Year, and we'll catch you after the year-end and the audits are done.
Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.