Q3 2022 Ladder Capital Corp Earnings Call
Following continued earnings and portfolio growth, we increased our quarterly dividend for the second straight quarter to <unk> 23 per share representing a 15% increase to date this year.
Our dividend was well covered by distributable earnings then.
A nine 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 one eight times and our underappreciated book value increased to $13 63 per share.
As an internally managed company with high insider ownership.
We run an inherently conservative in 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 multifamily are manufactured housing.
Our multifamily originations focus on newly constructed properties.
As of September 30, 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-19 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.
Not only from gains realized on periodic sales of assets ex significant premiums to underappreciated book value, but also by generating strong and reliable net rental income that contributed to our distributable earnings every quarter.
The portfolio was primarily comprised of necessity based net lease properties under long term leases to investment grade tenants.
These properties are financed with long term nonrecourse 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 loan.
Equity unsecured bonds of nonrecourse non mark to market that 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 reduce the cost of our revolving credit facility with our nine bank syndicate.
Our facility does not require a dedicated borrowing base. Unlike most of our 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 silver plus $2 50.
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, <unk> was formed in 2008 at the height of the financial crisis and.
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.
Just in the third quarter ladder generated distributable earnings of $34 3 million or 27 per share.
Our three segments continued to perform well during the third quarter.
Our $4 billion balance sheet loan portfolio was primarily floating rate and diverse in terms of collateral and geography.
And as Tom will discuss the 82% of the portfolio was 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 of 2025.
Our unsecured bonds have an overall weighted average maturity of approximately five years and a weighted average coupon of approximately four 7%.
During the third quarter balance sheet loan origination and funding was $182 million.
And as Pam will discuss 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 $2 million gain representing a 27% premium to unappreciated book value.
As of September 30, the carrying value of our securities portfolio was $611 million.
The portfolio was 86% AAA rated 99% investment grade rated with a weighted average duration of approximately one year.
Our assets are complemented by our best in class capital structure that remains anchored by a conservative combination of unsecured corporate bonds.
Nonrecourse, CLO and mortgage debt with a corporate credit rating one notch from investment grade from two of the three rating agencies.
As of September 30, we had over $750 million of total liquidity and our adjusted leverage ratio stood at one eight times.
This liquidity is in addition to the Undrawn capacity available to our seven committed loan warehouse facilities.
As of September 30th were only 42% utilized out of $1 3 billion of committed capacity.
We were pleased with the Upsized cost reduction and extension of our revolving credit facility in July .
The facility was extended for five years through July of 2027, and <unk>, 22% to $324 million.
In the interest rate was reduced the sofa, plus 250 basis points.
With further reductions upon achievement of investment an 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 30, our unencumbered asset pool stood at $2 8 billion, 75% of which was comprised of first mortgage loans and cash.
Yes.
During the third quarter, we repurchased $2 $6 million of our common stock at a weighted average price of $9 85.
And year to date, we have repurchased seven 3 million of stock at a weighted average price of $10 nine.
As previously reported in the third quarter, our board of directors increased the authorization level of our share buyback program for $50 million.
Our underappreciated book value per share was $13 63 at quarter end.
On $126 6 million shares outstanding as of September 30.
Finally, as Tom will discuss in the third quarter, we declared a <unk> 23 per share dividend, a 5% increase from prior quarters 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 dividends. 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 and the interest income Tom and 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 for.
Right 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 the comparison of our topline interest income versus our interest cost over the last 12 months.
In the third quarter of 2022, we earned $77 4 million.
And 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 466% with an average.
The 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 and non recourse match term financing via the commercial real estate CLO issuance from 2021 with managed periods that will be opened 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 return.
In most normally functioning markets rising rates will cause less demand for new loans as the refi channel for new loans flows.
This in turn causes a lack of supply in the mortgage backed securities market and credit spreads tend to tightening as rates rise and supplied windows.
In today's market, we're seeing in a scenario where interest rates are rising and credit spreads are widening at the same time.
While new loan production has slowed as expected the feds 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.
Borrowings 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 begin.
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 and 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 to higher rates and the strong dollar are raising the anxiety levels in capital markets day, but 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 Sir.
We will now begin the <unk>, we will now be conducting a question and answer session.
If you would like to ask a question to <unk> and one on your telephone.
A confirmation tone will indicate your line is in the question queue.
You May press Star and then two issuers like to remove yourself from the queue.
All participants using speaker equipment it.
It may be necessary to kick off go ahead, just a quick question with staff.
Just last question Michelle.
The first question is from Ricardo Chinchilla from Deutsche Bank. Please go ahead.
Hey, guys.
Thanks, Tim.
Joseph You mentioned in your final comments.
And a lot of opportunities in the short term are you filing in Brooklyn.
Judy.
<unk>.
In terms of you have 700 and keep the million dollar deals.
You could use that.
To pursue further deals.
Denise.
And what it.
It 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.
Okay.
I think.
The way we're looking at it is liquidity is difficult right now I Shouldnt say liquidity at ladder, but just refinancing loans as difficult as you've seen across the board from a few other people, but I think with the presence of the revolver of $324 million.
Don't feel overly concerned about using the capital that we've got on our balance sheet as I indicated.
Don't have much coming due at all in the for the rest of this year as well as all of next year.
And so we don't we don't anticipate being repaid.
<unk> quickly nor do we need to be repaid quickly in order to fund our future advances that we've gotten some of our loans, so and keep in mind not only do we have quite a bit of liquidity and the cash securities.
And revolver portion of our balance sheet, but we also own.
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 so as far as how low to go.
I don't anticipate were going to 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 a double a security. So my guess is we'll probably be pretty comfortable with the 100 $150 million of.
Of just.
Walk around cash.
And revolver.
We don't we don't feel like Theres anything pressing us in the near term here.
Perfect that's great.
Thank you so much.
Sure.
Yeah.
Thank you. The next question Neil Mitchell, Chris Malone from JMP Securities.
Thanks for taking my question and congrats on another nice quarter.
So you guys have talked about your multi cylinder approach in the past and given the slower economic picture today.
Do you see the allocation of capital deployment change.
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.
And in addition to that rising spreads accompanied by rising rates are causing less demand in.
In the loan portfolio, so 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, but.
The realities are have been doing this long enough to know that as rates go higher and spreads continue to widen and that will continue until the fed stopped selling mortgage backed securities.
And since May it will 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 were at 3% and you need a mezzanine loan you probably over leveraged but I do believe that there is going to be a lot of quality situations coming up on maturity dates with banks that are not going to be very patient and also cielo.
<unk> originators that are going to be looking to get paid off so we might even filling a mezzanine column also again whatever demands.
Capital markets need.
And our safe and.
Frankly high rate, you'll probably see us there so 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 slowly but I suspect we'll start buying some some more as the next year goes by.
Got it that's helpful and then 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 it really just the timing we received some pay off proceeds during the quarter and it was really just a timing thing.
Yeah.
That's helpful. Thanks for taking the questions.
Yeah.
Thank you ladies and gentlemen.
If you would like to ask a question. Please press star and then one now.
The next question Michelle just from Jade Rahmani from K DWP.
Yes.
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.
Session. It seems like the views are changing there for this to potentially be a severe recession.
Okay.
I don't.
Shirley Thank I would link a severe recession with stress in the lending markets for borrowers that have rates that are too high.
The unemployment number is pretty strong so far and I think overall, we saw the GDP consumer consumers in pretty good shape. So no I'm not I don't believe we're taking a view that this is going to be a severe recession.
And the reason why is because it's pretty clear the fed has.
Mandated this recession. This didn't just happen through enormous through a normal business cycle.
And I suspect that some point the fed despite their protestations, saying that theyre going to stamp out inflation at all costs.
I suspect the first Blink youll see from them will be them slowing their mortgage backed security sales and I think the second blank youll hear from them is that maybe 2% is not necessary, maybe maybe 4%. Okay for the next couple of years, because it's getting very expensive, they're losing a fortune selling their mortgage backed securities.
In markets like this so I think that there they have indicated there will be pain.
Take a quick look at eight eight big stocks on the NASDAQ.
And.
The losses associated with them. So the pain is there, but 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 and rental housing.
And they are very impacted.
Cost of automobiles and cost of financing of automobiles on credit cards. So so I think it is.
Unfortunately, it's going to be.
A.
Split decision really on how bad the recession is.
The bottom of the economic.
Later, we will feel it and are feeling it right now and a lot will depend really on what happens in this mid term election, but I still don't think that.
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 so I don't I still don't think it's going to 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 not reading that correctly in terms of interpolating your comments.
Oh, no I don't I wasn't making any comments relating to that.
I think that rates are high right now and so I think if youre borrowing money in the in the <unk>.
<unk> bond markets be it investment grade or high yield.
You borrow because you have to be and not because we want to be so I don't see that anytime in the near future because one we don't need the capital to its too expensive and.
There are cheaper sources of funding now on the secured side, but again, we run relatively low leverage that is part and parcel with what goes into becoming <unk> and we'll probably just remain there anyway, because we're able to obtain very attractive yields without using a lot of leverage right. Now. This is a this is a.
Windus opportunity set for us.
Thank you very much for taking the questions.
Sure.
The next question, we have is from rich <unk> from Columbia Threadneedle.
Yes.
Hey, guys I had a somewhat similar question, but a little derivative on it can.
Can you just share some insights on how you think about you just talked about the unsecured bond market being relatively expense that isn't that making sense today.
I'm guessing you're also kind of looking at.
What is the cost of funding there what is the cost of funding.
Hello secured side and then what is the asset spread.
On the loans you are making so could you maybe give us some insight in terms of what that delta looks like and.
If we stay in an environment of higher rates.
At what point would it maybe make sense to come to the unsecured market.
Uh huh.
I think what I'll do is I'll just give you what I think rates are as opposed to the delta is because if I start doing math quickly here I'll screw it up.
But we are writing loans now I would say on the.
Low side on the rates.
We lowered our ltvs across the board.
Sponsors understand that there isn't a lot of demand because they know also that rates are quite high and theres not a lot of liquidity right now in the bridge loan market. The CLO market is driving spreads wider.
So insurance companies and banks were filling that gap there not filling that gap quite as effectively anymore. I think the regulators are in the banks telling them too.
Maybe not add so much additional exposure. So you can be very picky, we're not a very big company, we right $25 million for the $200 million loans.
And.
I saw on the low side of rates right now we're about 7%.
We did sign an application this week at 15% so.
It would not be at all shocking to see a few.
Loans that we close with double digit rates along with points and of course, we would not be entering any secondary markets to try to finance those at this time because those are very acceptable returns.
Could probably drive very high rates within the mezzanine space, but.
Hi rates oftentimes lead to defaults so.
It will be very very cautious around that.
But 7% is in the low side, probably eight in the quarter eight and a half is comfortable on.
Can underwrite a 70 LTV there.
Most property types are doing okay with the jury out being on office.
Office has nine variations class, a b or C. What city is it and is it a.
Is there a lot of crime in the city is at work from home.
Theres too many varieties to go into here, but that's probably the the product type. That's most sensitive right now and the reason why really as they had two years, where they couldnt really lease the buildings and then as the economy opened and they began to start leasing the fed charged in and started raising rates. So it's time for them to re up their loans and re Korea fill there.
Insurance interest reserves, and thats, 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 crop and so.
You can comfortably REIT loans I think on hotels at relatively low ltvs. The point here I am making is this is the way we generally land and we're at a point, where we don't 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 and try to make as much money as possible and take a lot of risk.
Yes that would be a little bit crazy, so, but we do see lots of opportunities borrowers who have to do things and what we're particularly.
Happy with us because of 10 years with low interest rates. Many of these borrowers have ample reserves and they can write checks for three four or $5 million to deleverage their position and give themselves more time the fed the.
Said it was going to be painful. It is beginning to show up and I happen to think the fed will there we're already breaking things in commercial real estate and I think they're probably going to back off and see what the long term nature of their already prior moves they've made.
What does it mean and so I think we're going to enjoy higher rates, probably when I say enjoy im talking about Atlanta, not necessarily if you are a borrower, but I think that through 23, they will stay reasonably flat and theyre going to be relatively high because I think theres. Another 125 coming between here and new year's and we should do very well.
That environment because of the way we're structured on liability side.
I don't know if that answered yet.
And Oh by the way.
I think that partly answers it sounds like it's much more interesting to make loan them to for instance, allocate capital to repurchasing <unk>, Bob but do you have in the past.
And I'm also guessing you guys said, maybe in January you talked about maybe issuing unsecured.
That sounds like it's probably off the table for the.
Yeah.
Mediate future yeah.
At current rates I think that is probably off the table because we have plenty of capital and frankly, there is just not a lot of demand on the loan side. The security side is very attractive right now too but it.
It does require leverage in order to hit.
A AAA CLO right now you can lever those to 'twenty four 'twenty, 5% returns.
And.
Plenty of room in that in the World and I think thats, probably where that will stop I don't think they get much wider here.
<unk>.
But yes, I think we have been a buyer of our stock we have been a buyer of our bonds as much as recently as last quarter if.
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.
We are not at all concerned about having capital.
That's coming due in seven years, if the price gets cheap enough or we can't find a better investment we will take it off the market.
Okay. Thank you for your comments.
Thank you.
Yes.
The next question, we have is from Matthew Howlett from B Riley.
Yeah.
Oh, Hey, everybody. Thanks for taking my question.
Yes.
I'll go back to the slide 14 again.
Some quarters have been asking the same thing, but when you look at the interest sensitivities just.
Just impressive.
200 bps to the 44 cents to our business.
And Thats as of 930, so I guess just my obvious question is it looks like the fed is going to stop row, either a four five or five was up clearly 200 from where LIBOR was at 930, what can you tell us in terms of.
NII guidance, if the fed does go to these levels markets' predicting now.
Okay.
Yes, I think this is Paul <unk>, our top line, we are 89% of our loan book is floating rate, 90% of our securities book is floating rate. So that should steadily increase as these rates cement into our interest income all the while our liability structure with half of it being fixed.
This expense line item goes up less so.
Yes.
It's a balance sheet is in terrific shape, I think you're just an outlier relative to peers to add this and I guess just the second obvious question is.
Would you take the dividend up to 35 cents I mean, what would your quarterly dividend.
How inclined or you just keep raising it.
Given where NII is tracking.
Okay.
We're certainly not going to communicated dividend policy here.
That's for the boardroom, which comes up but 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 sofa, which it should.
That's probably 16.
A year or so for a quarter. So we're already covering our.
Dividend through just real estate end.
And loans.
As long as the credit is holding up and put.
But 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 roe's, we're going to generate on recent investments as well as new ones will far exceed.
The Roe associated with buying stock back or.
Or just raising a dividend, but but it's never one or the other it's always all of them together.
We've been we have raised our dividend, 15% this year and I don't know if well do it again in December we might though.
And is this all depends on the backdrop of how not just how the credit is performing but also what borrowers are saying to us.
But we are not at all shy about pushing dollars into the dividend column, the stock buyback, calling more demand back buyback.
Column, they're all very attractive right now and 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 know I don't want to imply that we have no interest at all in those we do we're very interested in them and I know as large shareholders ourselves we.
I would like to say, we are a large shareholder but so this is mark zuckerberg. So I'm a little concerned we don't go too far with that conversation, but but 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 and we just can't transact for some reason because it just moved too far.
Our too fast in the economy really does go into a downturn, we would probably get a little slow on capital.
Outflows, but 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 and rates have gone up we're making more money, we expect them to keep going up we will keep making more money and we built a mousetrap that does very well as the fed is raising rates into a slowing economy. So of course, we're going to share that with our shareholders either through dividend.
Stock buybacks or superior investments.
Hi, I just wanted to add when Brian says, we're covering our dividend through real estate and loans. He means net rental income because that's something I think people overlook when they talk about our real estate portfolio and the lumpiness of the gains on sale, which we don't think we think we've demonstrated pretty consistently but when he refers to real estate. It's net rental income, which is and I tried to make that point.
My comments that I do think people overlook the component of that that contributes to our distributable earnings every quarter.
No I guess big picture, sometimes I'm just talking cash flows.
No look it's a put part of the portfolio that that gets overlooked by investors or does it seem like.
You can trade well below your underappreciated book.
It's clearly something that I think being overlooked.
So with that said I think the CLO is that they don't their reinvestment periods don't and you said for 12 months to the <unk> T is outstanding.
Got to out I think one ends in June or July and the other is in December or January of next year.
Okay. Okay, Great and then the last question that you touched on a little bit just on the general office.
Sector.
What's your take is this just a.
New York Silly, Seattle L a issue.
You see major distress.
Conversions into <unk>.
Rentals, just you've taken when you when would you get involved in.
People that would be back to the office because of a recession is that did it cause occupancy just go a little bit your thoughts as always appreciate here.
Sure.
First of all I thought after labor day, we would get a quick read on what the story was going to be about work from home versus work and return to office.
It is clear that and it may be because of.
This slowdown in the economy, that's going on but.
<unk> back to office move as winning at.
At least as far as I can tell in New York. It certainly is waning I don't think its coming back Monday to Friday, I think Friday is going to be.
A day, where people will probably work from home.
But that's not going to affect the office market too much.
In in any city really what it will effect as the restaurants in the Pizza places in the bagel stores, because 20% and Thats not a normal day Friday and Thats the day, where they they make a lot of money.
So I think that they're going to feel it a little on naturally but realistically in order to carry office products now in order to own it it's going to be more expensive. So office buildings are worth less now than they were last year generally, but theyre not in free fall and I think the difficulty, which I think you'll probably see this year and I think you are beginning to see the bigger.
Innings of it is if you if youre a floating rate loan on an office building from 2018 or 19, you bought a building you thought you were going to refurbish it and re tenanted and you had some interest reserves that you thought were adequate for a couple of years, while interest rates were low and <unk>.
Cause of the pandemic the first ball that hit you was.
You Couldnt really leisure buildings, because no one was even going to work, but you have to keep paying your interest. So your interest reserves ran out your lender was tolerant if you've made a payment to them. He gave you a little more time and what happened in a lot of these bridge loans is by definition their transactional.
So they have gotten them lease partially very few of them are empty. So a lot of the rehab work got done and they got tenants in for 50 60, 70% of the buildings and.
We're not finished at this point and most of these loans require a debt yield test and at 60% leverage I'm, sorry, 60% occupancy after three or four years Youre not meeting that test. So you don't have the option available. In addition to that if you do have to extend alone you're going to have to buy a LIBOR cap or a sofa.
Cap, which is much more expensive now in addition to the actual rate youll be paying so the delay in <unk>.
<unk> ability to work on your office buildings hurt for two years as the economy opens up it got better and I think that there was this hesitation on our people really going to go back to the office as that question gets answered and it's mostly yes, but not completely yes.
You are now being asked to re up even though you're three quarters of the way through year project and its now costing a lot and you can anticipate coming out in a year from now if you do pay your debt down and pay your higher rate youre going to have a higher cap rate anyway. So I do believe you're going to see some office buildings change hands here and but I think.
It's mostly because of the technicality that took place on the delay on the office relative to hotel and apartments, and but I think it will be a very.
I don't think youre going to see incredible bargains and office, because I think you're in another year theyre going to 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.
And there are empty.
Sublease space available. That's also a lot of the sublease tenants that are in these buildings are expiring soon and 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 going to impact the story a little bit.
We will see New York seems to be doing better and it seems to be trying to address some of the social problems that exist.
Cargo is trying to address its problems. It is not doing very well and Philadelphia is is not in great shape.
Los Angeles has issues for sure, but none of these are insurmountable right now.
You are beginning to see the pendulum swing the other way away from the social experiment of.
No cash bail and just put people back on the street, it's kind of amazing when you read an article about an arrest thats been made and you read the history on the Guy they arrested and within our S. Three or four times in the last few months. So I think if they get that under control there'll be fine and I don't think this is lost yet.
But it is going to be difficult if they if they don't make people feel safer in these cities.
I really appreciate all the color thanks, everyone. Thanks, Brian Yeah.
Thank you.
Next question.
Paul Wolff from DTE energy.
Hey, Thanks for taking my question I'm on for Eric Hagen Tonight can you touch on your <unk> reserve and how sensitive how sensitive it'll be to interest rates going forward.
Yes. 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 Max.
Backdrop.
Yes, I would just add here too and there 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 going to create a lot of seasonal reserves.
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.
So we will respond to the overall economy in the seasonal reserve, but interest rates rising may or may not cause us to think that the economy is deteriorating.
Got it alright, that's it for me thank you.
Mhm.
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.
Yes.
Thanks. So just wondering was there any change in credit performance during the quarter.
Yeah.
No.
Great. Thanks.
Okay. Thank.
Thank you.
Okay.
Thank you.
At this point there are no further questions I would like to turn the floor back over to chip.
Ryan Chavez for closing comments.
Yes.
Just want to thank everybody for paying attention during the year as well as today I know it will be a little bit longer between now and the next time, we talk but we appreciate the time and attention you've given in following our company and hopefully we've been transparent in conveying to you.
The strength of the organization and how how far it's come so.
Other than that I'll, just say happy new year, and we'll catch you.
After the year end and the audits are done.
Okay.
Thank you Sir.
Ladies and gentlemen, we'll conclude today's conference. Thank you for joining US you may now disconnect your lines.
Yeah.