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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 1.8x 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 multifamily or manufactured housing with our multifamily originations focused 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 loan 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 ex-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 was 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, upsized and reduced the cost of our revolving credit facility with our non-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 5 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 dividends. We also remain positively correlated to rising rates. While all of this enable 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 3 segments continue 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. And 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 of 2025. Our unsecured bonds have an overall weighted average maturity of approximately 5 years and a weighted average coupon of approximately 4.7%. During the third quarter, balance sheet loan origination and funding was $182 million. And 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 2/3 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 1 net lease property which generated $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 was 86% AAA rated, 99% investment grade rated with a weighted average duration of approximately 1 year. Our assets are complemented by our best-in-class capital structure that remains anchored by a conservative combination of unsecured corporate bonds, non-recourse CLO's and mortgage debt with the corporate credit rating 1 notch from investment grade from 2 of the 3 rating agencies. As of September 30, we had over $750 million of total liquidity, and our adjusted leverage ratio stood at 1.8x. This liquidity is an addition to the undrawn capacity available to our 7 committed loan warehouse facilities, which as of September 30, 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 5 years to July of 2027 and upsized 22% to $324 million. Any interest rate was reduced to SOFR plus 250 basis points, with further reductions upon achievement of 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. 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 $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 the 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 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 in the interest income column 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 funds rate into slowing the 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 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 5 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 match 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 return. 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 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, higher rates and the strong dollar are raising anxiety levels in capital markets today. 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.
[Operator Instructions] The first question we have is from Ricardo Chinchilla from Deutsche Bank.
Just as you mentioned in your final comments, there's been a lot of opportunities in the short-term. How you balance investments in short-term opportunities versus liquidity in terms of -- you have $750 million through the [ IPO ] that we could reduce that in order to pursue further deal or further opportunities. And why do you guys believe 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?
I think the way we're looking at it is liquidity is difficult right now. I shouldn't say liquidity at Ladder, but just refinancing loans is 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, 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. And so 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 gotten in 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 we're 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 AA security. So my guess is that, we'll probably be pretty comfortable with $100 million to $150 million of just walk around cash and revolver. We don't feel like there is anything pressing us in the near term here.
The next question we have is from Chris Muller from JMP Securities.
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 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 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, we've been doing this long enough to know that as rates go higher and spread continue to widen, and that will continue until the Feds stop selling mortgage-backed securities. I would anticipate, we'll probably start adding real estate here. And 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. 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 CLO originators that are going to be looking to get paid off. So 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. 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 slow there, but I suspect we'll start buying 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 really just the timing we received some payoff proceeds during the quarter and it was really just a timing thing.
[Operator Instructions] The next question, we have is from Jade Rahmani from KBW.
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? It 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. Yes, the unemployment number is pretty strong so far and I think overall, we saw the GDP consumers in pretty good shape. So no, I'm not necessarily -- 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 a normal business cycle, and I suspect at some point the Fed, despite their protestation and 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 security sales, and I think the second blink you'll hear from them is that maybe 2% is not necessary and 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. So I think that -- they have indicated, there will be pain. Take a quick look at 8 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 in rental housing. And they are very impacted by the cost of automobiles, and the cost of financing of automobiles, and credit cards. So I think it's unfortunately it's going to be a split decision really on how bad the recession is. I think the bottom of the economic ladder, we'll feel it and are feeling it right now. And a lot will depend really on what happens in this midterm 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.
In terms of investment grade, it 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 interpolating your comments?
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 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 want to be. So I don't see that anytime in the near future because 1, we don't need the capital. 2 it's too expensive, and they 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 IG, 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 tremendous opportunity set for us.
The next question we have is from Rich 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 and how you think about, and you just talked about the unsecured bond market being relatively expensive and not 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 on the CLO secured side? And then what is the asset spread on the loans you're 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?
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 the 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 probably lowered our LTVs across the board and sponsors understand that. There isn't a lot of demand because 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. So insurance companies and banks were filling that gap, they're not filling that gap quite as effectively anymore. I think the regulators and the banks telling them to maybe not add so much additional exposure. So you can be very picky, we're not a very big company, we write $25 million to $200 million loans and I thought 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 closed 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. We could probably drive very high rates – in the mezzanine space, but very high rates often translate to defaults. So I think, we will be very, very cautious around that. So but 7% is in the low side, probably 8.25%/8.5% is comfortable - we can underwrite a 70 LTV there, most property types are doing okay with the jury out being 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? There is too many varieties to go into here. But that's probably the product type that's most sensitive right now. And the reason why really is they had 2 years where they couldn't release buildings.
And then as the economy opened and they began to start leasing. The Fed charged them and started raising rates. So it's time for them to re-up their loans and re-fill interest reserves. And that is causing a little bit of stress in the system. Hotels are doing very well, with the exception of business hotels in big cities with lot of crime. And so you can comfortably write loans I think on hotels at relatively low LTVs. The point here I am making is this is the way we generally lend and we're at 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 and try to make as much money as possible, and take a lot of risks. 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 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 or $5 million to deleverage their position and give themselves more time. The Fed said it was going to 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 going to back up and see what the long-term nature of their already -- the 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, I'm talking about Ladder, not necessarily your borrower. But I think that through '23 they'll stay reasonably flat and they're going to be relatively high because I think there's another $125 coming between here and new year's and 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 yet. But and by the way on that…
I think that partly answers. It sounds like it's much more interesting to make loans than to for instance, allocate capital to repurchasing your bonds that you have in the past. And I'm also guessing you guys said maybe in January you talked about -- maybe issuing unsecured, I think that sounds like it's probably off the table for the immediate future?
Yes, at current rates, I think that is probably off the table because we have plenty of capital and 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 requires leverage in order to hit, but a AAA CLO right now you can lever those to 24% and 25% returns and plenty of room in that in the world and I think that's probably where that will stop. I don't think they get much wider here, but 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 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 7 years. If the price gets cheap enough that we can find a better investment, we will take it off the market.
The next question we have is from Matthew Howlett from B. Riley.
We'll go back to the Slide 14 again, in the last few quarters I've been asking the same thing, but when you look at the interest sensitivity it is just impressive about the 200 bps to $0.44 and 200 bps. That's as of 9/30. So I guess just my obvious question is, it looks like the Fed is going to stop either a 4.5% or 5% clearly 200 from where, LIBOR was at 9/30. I mean what can you tell us in terms of NII guidance if the Fed does go to these levels with the markets predicting now?
Yes, I think -- this is Paul . Our top line, 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 would have been fixed. Our interest expense line item goes up less, so 83%.
It's true your balance sheet's in terrific shape. I think you're just an outlier relative to peers to have this and I guess, just the second obvious question is, I mean, would you take the dividend up to $0.35? I mean, what would you quarterly dividend how inclined, are you just keep raising it -- given where NII is tracking?
We're certainly not going to communicate a dividend policy here for that's for the boardroom which comes up, but we are shareholder friendly. We try to raise our dividends 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, so we're already covering our dividend through just real estate and loans. So as long as the credit is holding up and, 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 ROEs we're going to generate on recent investments as well as new ones will far exceed the ROE associated with buying stock back or just raising the dividend. 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 yes, I don't know if we'll do it again in December, we might though. And 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 column or bond 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 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, I would like to say we're a large shareholder, but so is Mark Zuckerberg, so I'm a little concerned, we don't go too far with that conversation. 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 an opportunity, and 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. Yes we'd 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 quarter after quarter. If rates go up, we make more money, rates have gone up we making more money. We expect them to keep going up, we'll keep making more money. And we've built a mouse trap 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 dividends stock buybacks or for superior investments.
I just want 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 don't 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, I'm pretty consistently, but when he refers to real estate its net rental income which is and I tried to make that point in my comments. But I do think people overlook the component of that contributes to our distributable earnings every quarter.
Yes no, I get, big picture, sometimes, I'm just talking cash flows.
No, look it's important part of the portfolio that they can zoom over look by investors, does it seem like you trade well below your underappreciated book and then it's clearly something that I think being overlooked. So with that said, I think your CLOs are bit old, they are reinvestment periods don't end you said for 12 months, the 2 you had outstanding?
Yes, we got 2 out. I think one ends in June and July and the other is in December of January of next year.
Great, okay. And a last question and you touched on a little bit just on the general office sector. What your take is this just your sale in Seattle LA issue. You can see major dress. Because originals into rentals. Just to take it when would you get involved? And people could be back to the office because of a recession. Is that going to cause occupancy just go a little bit your thoughts. I always appreciate…
Sure. First of all, I thought after Labor Day we would get a quick read on what the story was going about, work from home versus work and return to office. It is clear that and it may be because of the slowdown in the economy that's going on. But the back to office move is winning at least as far as I can tell. In New York it certainly is winning. I don’t 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 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. So I think that they're going to feel it a little unnaturally, 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 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 and 2019, you bought a building, you thought you were going to refurbish it, and tenant it, and you had some interest reserves that you thought were adequate for a couple of years, while interest rates were low. And because of the pandemic, the first ball that hit you was you couldn't really lease your buildings, because no one was even going to work, but you have to keep paying your interest. So your interest reserves ran out your, 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 there transitional, so they have gotten them to 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 if you'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 3 or 4 years, you are not meeting that test, so you don't have the option available in addition to that, if you do have to extend the loan, you're going to 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. So the delay in the ability to work on your office buildings hurt for 2 years as the economy opened 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 3 quarters of the way through the year project, and it's now costing a lot and you can anticipate coming out in a year from now. If you do peg debt down and pay a higher rate, you're going to have a higher cap rate anyway. So I do believe you're going to see some office buildings change hands here but that's -- 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'll be very -- I don't think you're going to see incredible bargains and office because I think here in another year they're 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 there are empty -- there's 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 mid-term elections are going to impact the story, a little bit, we'll see. New York seems to be doing better, and it 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 and Philadelphia is not in great shape and Los Angeles has issues for sure, but none of these are insurmountable right now. And you're beginning to see the pendulum swings, 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 that's been made and you read the history on the guy they arrested -- and has been arrested 3x or 4x in the last few months. So I think if they get that under control, they'll be fine. And I don't think this is lost yet, but it is going to be difficult, if they don't make people feel safer in these cities.
Next question we have is from Ethan Saghi from BTIG.
I'm on for Eric Hagen tonight. Can you touch on your CECL reserve and how sensitive, it will be to interest rates going forward?
Yes, this is Paul. I wouldn't say it's necessarily sensitive to interest rates. We did take it up from 37 basis points to 41 basis points, but that was more just due to the backdrop.
Yes, I would just add here and there's 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 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. So 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 has deteriorated.
[Operator Instructions] We have a follow-up question from Jade Rahmani.
Just wondering, was there any change in credit performance during the quarter?
No.
At this stage, there are no further questions. I would like to turn the floor back over to Brian Harris for closing comments.
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 and following our company and hopefully, we've been transparent and conveying to you the strength of the organization and 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.
Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.