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Operator
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 releases 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 McCormick.
Ladder
Thank you and good evening, everyone. For the third quarter of 2022, latter generated distributable earnings of $34.3 million, or 27 cents per share. In September, following continued earnings and portfolio growth, we increased our quarterly dividend for the second straight quarter to 23 cents 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 30th, 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 multifamily or manufactured housing, with our multifamily originations focused on newly constructed properties. As of September 30th, our balance sheet loan portfolio had a weighted average loan 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 underappreciated 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 nine bank syndicates. 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 VLADA 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 dividends. 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 we'll present as a result of any dislocation in our space. As a reminder, LADA 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.
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. 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 five 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 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 undepreciated book value. As of September 30th, 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 one 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 30th, 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 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 to July of 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 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 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. 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 underappreciated book value per share was $13.63 at quarter end, based on 126.6 million shares outstanding as of September 30th. Finally, as Pamela discussed in the third quarter, we declared a 23 cent per share dividend, a 5% increase from prior quarter's dividend, which was paid on October 17th. 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.
Pamela
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 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 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 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. 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 the 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.
Paul
I'll now turn the call over to Q&A.
Brian
Thank you, Seth. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 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. The first question we have is from Ricardo Chinchilla from Deutsche Bank. Please go ahead.
Seth
Hey, guys. Just as you mentioned in your final comments, you mentioned 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 UDI fields that you could reduce that in order to pursue further deals or further opportunities? And what 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?
Pamela
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 got in some of our loans. And 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. So as far as how low would it 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 we'll probably be pretty comfortable with $100, $150 million of just walk around cash and revolver. We don't feel like there's anything pressing us in the near term here.
Seth
Perfect. That's very helpful. Thank you so much.
Brian
Sure. Thank you. The next question we have is from Chris Muller from JMP Securities.
Chris Muller
Thanks for taking the 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 changing over the coming quarters within that multi-cylinder approach?
Pamela
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 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. And we have not really been a mezzanine lender in any significant manner. I've said a few times, if interest rates are at 3% and you need a mezzanine loan, you're probably overleveraged. But I do believe that there's 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.
Chris Muller
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 quarters now. Is there anything to read into that, or is that kind of just the dynamics of the balance sheet?
Eric Hagan
No, that was really just the timing. We received some payoff proceeds during the quarter, and it was really just a timing thing.
Chris Muller
Got it. Helpful. Thanks for taking the questions.
Brian
Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one no. The next question we have is from Jade Romani from KBW.
spk03
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? It seems like the views are changing there for this to potentially be a severe recession.
Pamela
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. The unemployment number is pretty strong so far. And I think overall, we saw the GDP consumers in pretty good shape. So no, 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. 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 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 in rental housing. And they're very impacted by cost of automobiles and cost of financing of automobiles and credit cards. So I think it's a, unfortunately, it's going to 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. And a lot will depend really on what happens in this midterm election. But I still don't think that, you know, just housing prices dropping 15 or 20 percent from the highs, that would still put them up about 30 percent in the prior year and a half. So I still don't think it's going to be all that bad.
spk03
Thanks for that. In terms of investment grade, sounds like there might have been some steps in the right direction there, or am I not reading that correctly in terms of interpolating your comments?
Pamela
Oh, no, I wasn't making any comments relating to that. I think that, yeah, 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 any time in the near future because, one, we don't need the capital, two, it's 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 IG. And 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.
spk03
Thank you very much for taking the questions.
Paul
Sure.
Brian
The next question we have is from Rich Gross from Columbia Threadneedle Investments.
Rich Gross
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, you know, 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, 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? So could you maybe give us some insights in terms of what that Delta looks like? And, you know, if we stay in a, an environment of higher rates, you know, at what point would it maybe make sense to come to the unscrewed market?
Pamela
Uh, 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. But, you know, we're writing loans now, I would say on the, low side on the rates. We've 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 are in 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 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. We could probably drive very high rates in the mezzanine space, but very high rates oftentimes lead to defaults. So I think we'll be very, very cautious around that. So, um, but, but 7% is the low side, probably eight and a quarter, eight and a half is comfortable on, you know, we can underwrite a 70 LTV there. Um, most property types are doing okay with the jury out being on office. Um, office has nine variations, uh, class a, B or C what city is it in? Is it a, uh, 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. And the reason why really is they had two years where they couldn't 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-fill their interest reserves. And 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. And so 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. That would be a little bit crazy. 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 three, four, five million dollars 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 off and see what the long-term nature of their already, you know, the prior moves they've made, what, what does it mean? And so I think we're going to enjoy higher rates, probably when I say enjoy, I'm talking about a ladder, not necessarily if you're a borrower, but I think that through 23, they'll, 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 you.
Rich Gross
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 a near bond like you have in the past. And 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 table for the immediate future.
Pamela
Yeah, 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 require leverage. in order to hit, but a AAA CLO right now, you can lever those to 24, 25% returns and plenty of room in that in the world. And I think that's probably where that'll stop. I don't think they get much wider here. But yeah, 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. 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.
Rich Gross
Okay, thank you for your comments. Thank you.
Brian
The next question we have is from Matthew Howlett from DUI.
Matthew Howlett
Hello, everybody. Thanks for taking my question. To go back to the slide 14 again, the last few quarters I've been asking the same thing, but when you look at the interest sensitivity, it's just impressive with the 200 bps to the 44 cents and the 200 bps, and that's as of 9.30. So I guess just my obvious question is, it looks like Bethesda's going to stop around either 4.5 or 5. It's up clearly 200 from where Labra was at 9.30. What can you tell us in terms of you know, NII guidance. If the Fed does go to these levels, the market's predicting them.
Paul
Yeah, I think, as 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, with half of it being fixed, you know, our interest expense line item goes up less. So, yeah. Yeah.
Matthew Howlett
Look, your balance sheet is 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? I mean, how inclined are you to just keep raising it, you know, given where NIA is tracking?
Pamela
We're certainly not going to communicate a 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 or SOFR, which it should, that's probably $0.16 a year, so $0.04 a quarter. So we're already covering our dividends through just real estate and loans. So as long as the credit is holding up, 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 a dividend. But it's never one or the other. It's always all of them together. You know, we've been, 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. And is this all depends on the backdrop of how it's not just how the credit is performing, but also what borrowers are saying to us. Um, but, but we are not at all shy about pushing dollars into the dividend column, the stock buyback column or the bond back buyback, um, column. they're all very attractive right now. And, 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, 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, we, we, I was like saying 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 yeah, 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 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. 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. rates have gone up. We're making more money. We expect them to keep going up. We'll keep making more money. And we've 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 dividends, stock buybacks, or superior investments.
Ladder
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 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 in my comments because I do think people overlook the component of that that contributes to our distributable earnings every quarter.
Pamela
I get big picture sometimes. I'm just talking cash flows.
Matthew Howlett
No, look, it's part of the portfolio that gets overlooked by investors. It doesn't seem like, you know, you trade well below your underappreciated book and, you know, It's clearly something that I think is being overlooked. So with that said, I heard you're at the CLOs. Their reinvestment periods don't end, you said, for 12 months, the two years outstanding?
Pamela
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.
Matthew Howlett
Great. Okay. Great. And the last question, you touched on a little bit just on the general office sector, moving What's your take? Is this just a New York, Philly, Seattle, L.A. issue? Do you see major distress, conversions in the rentals? Just your take, when would you get involved? Are people going to be back to the office because of a recession? Is that going to cause... Just go over a little bit of your thoughts. I'd always appreciate hearing.
Pamela
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 in return to office. It is clear that, and it may be because of this 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 think it's coming back Monday to Friday. I think Friday is going to be, you know, a day where, you know, 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 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 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, uh, you know, you couldn't really lease your buildings, uh, because no one was even going to work, but you had to keep paying your interest. So your interest reserves ran out. Your, your lender was tolerant. If he made a payment to him, you know, he gave you a little more time. And what happened in a lot of these bridge loans is by definition, they're transitional. So they have gotten them least 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, at 60% occupancy after three or four years, you're 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 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. So 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 are people really going to 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, and you can anticipate coming out in a year from now, if you do pay your debt down and pay your 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 I think it's mostly because of the technicality that took place on the delay on the office relative to hotel and apartments. But I think it'll be a very – I don't think you're going to see incredible bargains in office because I think 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'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 midterm elections are going to 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. 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 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 that's been made and you read the history on the guy they arrested and he's been arrested three or four times 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.
Matthew Howlett
I really appreciate all the clarity. Thanks, everyone. Thanks, Brian.
Brian
Yes. Thank you. Next question we have is from Ethan from DTIG.
Ethan
Hey, thanks for taking my question. I'm on for Eric Hagan tonight. Can you touch on your CECL Reserve and how sensitive it'll be to interest rates going forward?
Eric Hagan
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.
Pamela
Yeah, I would just add here, too, and 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 that's not going to create a lot of cecil reserves if interest rates are going up because of inflation while growth is flowing 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 cecil reserve But interest rates rising may or may not cause us to think that the economy is deteriorating.
Ethan
Got it. All right. That's it for me. Thank you.
Brian
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 Romanis.
spk03
Thanks. Just wondering, was there any change in credit performance during the quarter? No.
Seth
Great.
spk03
Thanks.
Seth
Okay. Thank you.
Brian
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.
Pamela
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. But, you know, we appreciate the time and attention you've given and following our company. And hopefully we've been transparent and conveying to you, you know, 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.
Brian
Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.
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