Earnings Call Transcript - LADR Q3 2022

Operator, 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 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.

Pamela McCormack, President

Thank you and good evening everyone. For the third quarter of 2022, Ladder generated distributable earnings of $34.3 million or $0.27 per share. In September, following continued earnings and portfolio growth, we increased our quarterly dividend for the second straight quarter to $0.23 per share, representing a 15% increase to date this year. Our dividend was well covered by distributable earnings; the 9.1% ROE we generated this quarter was driven primarily by strong net interest margin and rental income. As of September 30, our adjusted leverage ratio was only 1.8 times and our undepreciated book value increased to $13.63 per share. As an internally managed company with high insider ownership, we run an inherently conservative and simple business that is primarily focused on senior secured assets and exclusively focused on domestic commercial real estate. Management and the board continue to own over 10% of the company, which we believe should give a lot of confidence to our fellow shareholders and partners, perhaps now more than ever. In the third quarter, we originated $159 million of balance sheet loans, 86% of which were either 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%. 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 conservatively recent valuations with newly capitalized business plans and ample reserves in place. Our real estate equity portfolio continues to contribute meaningfully to distributable earnings, not only from gains realized on periodic sales of assets at significant premiums to undepreciated book value, but also by generating strong and reliable net rental income that contributed to our distributable earnings every quarter. The portfolio is primarily comprised of necessity-based Net Lease properties, under long-term leases to investment-grade tenants. These properties are financed with long-term non-recourse non-mark-to-market debt and are 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 a 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 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 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 leave 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.

Paul Miceli, CFO

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 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 increasing 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 leased properties, representing approximately two-thirds of the segments. Our net lease tenants are strong credits, primarily investment grade rated and committed to long-term leases, with an average remaining lease term of 10 years. During the third quarter, we sold one net lease property which generated a $2 million gain representing a 27% premium to undepreciated book value. As of September 30, the carrying value of our securities portfolio was $611 million. The portfolio is 86% AAA rated, 99% investment grade rated with a weighted average duration of approximately 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 30, 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 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 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 investment and 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 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'll turn the call over to Brian.

Brian Harris, CIO

Thanks, Paul. The third quarter was a relatively 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. I'll now turn the call over to Q&A.

Operator, Operator

Thank you. We will now begin our question-and-answer session. The first question is from Ricardo Chinchilla from Deutsche Bank. Please go ahead.

Unidentified Analyst, Analyst

Hey everyone. As you mentioned in your closing remarks, there are many short-term opportunities available. How do you balance investing in these short-term prospects with maintaining liquidity, considering you have $750 million? Do you believe you could decrease that amount to pursue additional deals, or what do you think is the minimum liquidity or maximum leverage you would consider for your portfolio to capitalize on these opportunities, given your current outlook?

Brian Harris, CIO

I think the way we're looking at it is, liquidity is difficult right now, as I shouldn't say liquidity at Ladder, but just refinancing loans is difficult, as you’ve seen 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 some of our loans. So, and keep in mind, not only do we have quite a bit of liquidity in the cash securities, and the revolver portion of our balance sheet, but we also own other things that are pretty liquid also as well as unencumbered real estate, which I think we've even got commitments on our refund 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.

Unidentified Analyst, Analyst

Perfect. That's very helpful. Thank you so much.

Brian Harris, CIO

Sure.

Operator, Operator

Thank you. The next question we have is from Chris Muller from JMP Securities.

Chris Muller, Analyst

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?

Brian Harris, CIO

It's clear to me that rising rates are leading to wider cap rates. Additionally, the increasing spreads along with rising rates are diminishing demand in our loan portfolio. For several quarters, we've emphasized that focusing on bridge loans is the best strategy right now. Since last October, our primary focus has been on multi-family properties. However, having been in this industry long enough, it's evident that as rates increase and spreads continue to widen, this trend will persist until the Fed halts the sale of mortgage-backed securities. I expect we will begin to invest in real estate again. We haven't been significant mezzanine lenders in the past. I've mentioned before that if interest rates are 3% and a mezzanine loan is needed, it’s likely that there is too much leverage. Nonetheless, I believe we will encounter many quality opportunities as maturity dates approach, particularly with banks that may not be very patient and CLO originators looking for a payoff. Therefore, we might also engage in mezzanine financing as the capital markets demand it, provided it remains safe and offers high rates. While we have sold some real estate over the last few quarters, I anticipate that we'll slow down on sales but begin purchasing more as the next year progresses.

Chris Muller, Analyst

Got it, that's helpful. And then just to clarify on the cash balances, it looks like it picked 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?

Brian Harris, CIO

No, that was really just the timing; we received some payoff proceeds in the quarter. And it was really just a timing thing.

Chris Muller, Analyst

That's helpful. Thanks for taking the questions.

Operator, Operator

Thank you. The next question we have is from Jade Rahmani from KBW.

Jade Rahmani, Analyst

Thanks very much. Are you anticipating widespread distress this cycle, this downturn or do you still stand by the view that this is going to be sort of a moderate recession? Seems like the views are changing there for this to potentially be a severe recession?

Brian Harris, CIO

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, consumer is in pretty good shape. So no, not necessarily, I don't believe we're taking a view that this is going to be a severe recession. The reason why is because it's pretty clear the Fed has mandated this recession; this didn't just happen through a normal business cycle. And I suspect at some point, the Fed despite their protestations 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, and 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. They're very impacted by the cost of automobiles and cost of financing of automobiles and credit cards. So, I think it's unfortunately, 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 just housing prices dropping 15% or 20% from the highs would still put them up about 30% in the prior year and a half. So I still don't think it's going to be all that bad.

Jade Rahmani, Analyst

Thanks for that. In terms of investment grade, sounds like there might have been some steps in the right direction there or is that not? Am I not reading that correctly in terms of interpolating your comments?

Brian Harris, CIO

No, 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 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.

Jade Rahmani, Analyst

Thank you very much for taking the questions.

Operator, Operator

The next question we have is from Rich Gross from Columbia Threadneedle Investments.

Rich Gross, Analyst

Hi guys, I had a somewhat similar question but a little derivative on it. Can you just share some insights on how you think about it, you just talked about the unsecured bond market being relatively expensive and 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 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 if we stay in an environment of higher rates, at what point would it maybe make sense to come to the unsecured market?

Brian Harris, CIO

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 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 raised $25 million to $200 million loans. And I thought in 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 within the mezzanine space, but very high rates oftentimes lead to defaults. So I think we'll be very, very cautious around that. So, but 7% is on the low side; probably 8.25% to 8.5% is comfortable and we 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 in? Is there a lot of crime in the city? Is it work from home? There are 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 read up their loans and refill 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 and 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. 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 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 off and see what the long-term nature of their already prior move 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 of Ladder, not necessarily if you're a 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. 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.

Rich Gross, Analyst

I think that the answer is it sounds like it's much more interesting to make loans than to, for instance, allocate capital to repurchasing your bonds 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.

Brian Harris, CIO

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 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 the world. And I think that's probably where that'll stop. I don't think they get much wider here. 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 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 that we can find a better investment, we will take it off the market.

Rich Gross, Analyst

Okay, thank you for your comments.

Operator, Operator

The next question we have is from Matthew Howlett from B. Riley.

Matthew Howlett, Analyst

Hi, everybody, thanks for taking my question. I just go back to the Slide 14 again in the last few quarters I have been asking the same thing but you look at the interest sensitivities just impressive. And with the 200 bps to the $0.44 and 200 bps, that is as of 9/30. So I guess just my obvious question is it looks like the Fed is going to stop either 4.5 or 5, that is clearly 200 from where LIBOR was at 9/30? What can you tell us in terms of NII guidance if the Fed does go to these levels, the markets predicting them?

Paul Miceli, CFO

Yes, this is Paul. A significant portion of our loan book, 89%, is at floating rates, and so is 90% of our security book. As these rates become established, our interest income should increase steadily, while our liability structure will be fixed. Consequently, our interest expense will rise at a slower pace.

Matthew Howlett, Analyst

Look, it's true what 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 your quarterly dividend, I mean? How inclined are you just keep raising it, given were NI is tracking?

Brian Harris, CIO

We won't be discussing a specific dividend policy at this time, as that belongs in the boardroom. However, we are committed to being shareholder friendly and aim to raise our dividend when possible. If the Federal Reserve raises rates by another 100 basis points, which should be reflected in LIBOR or SOFR, that could translate to an additional $0.16 per year or about $0.04 per quarter. Our dividends are already being covered through our real estate and loans, assuming the credit remains stable. Currently, we believe our shareholders would prefer us to invest capital, as the returns on equity from our recent and upcoming investments are likely to exceed those from stock buybacks or simply increasing the dividend. It’s not a matter of choosing one option over the others; we aim to do all of them collectively. We have increased our dividend by 15% this year, and while I cannot guarantee another raise in December, it will depend on the overall economic conditions and feedback from borrowers. We are more than willing to allocate funds toward dividends, stock buybacks, or further investments, as all these opportunities are appealing right now. There’s a wealth of attractive investment options available, but that doesn't mean we disregard dividends or buybacks; we remain very interested in both. As major shareholders ourselves, we manage the company cautiously with low leverage, focusing on the promising opportunities available. If we encounter situations where we cannot capitalize on certain opportunities because they move too quickly or if the economy takes a downturn, we might slow our capital outflows. However, at this moment, we don't foresee that happening. We've consistently stated that as rates rise, our profits increase. With rates having gone up, we are indeed profiting more, and we anticipate that trend will continue. Our business model is thriving with the Fed raising rates, even in a slowing economy. Therefore, we will continue to share those gains with our shareholders through dividends, stock buybacks, or superior investments.

Pamela McCormack, President

I want to emphasize that when Brian mentions covering our dividends through real estate and loans, he is referring to net rental income. This is often overlooked when discussing our real estate portfolio and the variability of gains on sale, which we believe we have consistently demonstrated. When he speaks about real estate, it specifically pertains to net rental income, and I tried to highlight this in my comments. However, it seems that many people tend to overlook how this aspect contributes to our distributable earnings each quarter.

Brian Harris, CIO

I get big picture sometimes. I'm just talking cash flows.

Matthew Howlett, Analyst

No, look, it's an important part of the portfolio that gets overlooked by investors. It doesn't seem like you trade well below your undepreciated book. And it's clearly something that I think is being overlooked. So with that said, I heard you had the CLOs; they don't, their reinvestment periods don't and you said for 12 months the one, the two years outstanding?

Brian Harris, CIO

Yes, 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, Analyst

Great. Okay. And the last question that you touched on a little bit just on the general office sector move? What's your take? Is this just a New York, Philly, Seattle, LA issue, just see major distress, conversions and the rentals? So what just you take and when would you get involved? Are people going to be back to the office because of a recession? Is that going to cause occupancy? Just go a little bit your thoughts, as always appreciate hearing?

Brian Harris, CIO

Sure. I initially thought we would quickly understand the trend between working from home and returning to the office after Labor Day. It is evident that, possibly due to the economic slowdown, the return-to-office movement is gaining traction, especially in New York. While I don't expect a full return Monday through Friday, Friday may still see people working from home. However, this won’t heavily impact the office market; rather, it will affect local restaurants and other businesses that rely on foot traffic, as Fridays are typically their busiest days. In terms of office space, it has become more costly to maintain ownership, so generally, office buildings are worth less now than last year, though they are not in freefall. The challenges are emerging for those with floating rate loans on office buildings bought around 2018 or 2019, where owners hoped to refurbish and lease properties but faced leasing issues during the pandemic. Many have partially leased their buildings but are struggling to meet required tests for their loans due to low occupancy rates after several years. Now, if they need to extend their loans, buying caps for interest rates has become significantly pricier as well. The delays caused by the pandemic have affected their performance; however, as the economy continues to recover, more people are expected to return to the office, providing more clarity. Although the answer leans towards yes for returning to the office, it isn’t a full agreement. Owners are now in a position where they need to invest more despite the rising costs, and while some office buildings may change hands, the situation will largely arise from technical delays rather than general bargains. I do have serious long-term concerns about San Francisco, as people are leaving and there’s an abundance of sublease space available. The issues there need urgent resolution for stabilization. Other cities like New York seem to be making progress in tackling social problems, while Chicago, Philadelphia, and Los Angeles are facing challenges, though none appear insurmountable right now. There are signs of positive shifts away from earlier ineffective strategies. If cities manage to ensure safety, there is potential for improvement. I believe there is still hope for these regions, but it is crucial to enhance safety perceptions for residents and businesses.

Matthew Howlett, Analyst

I really appreciate all the color. Thanks, everyone. Thanks Brian.

Brian Harris, CIO

Yes.

Operator, Operator

Thank you. Next question we have is from indiscernible from BTIG.

Unidentified Analyst, Analyst

Hey, thanks for taking my question. I'm on for Eric Hagan tonight. Can you touch on your seasonal reserve and how sensitive it'll be to interest rates going forward?

Paul Miceli, CFO

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 macro backdrop.

Brian Harris, CIO

Yes, I would just add here too, and it'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 seasonal 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 seasonal reserve, but interest rates rising may or may not cause us to think that the economy is deteriorating.

Unidentified Analyst, Analyst

Got it. All right, that's it for me. Thank you.

Operator, Operator

Thank you. We have a follow-up question from Jade Rahmani.

Jade Rahmani, Analyst

Thanks. Just wondering, was there any change in credit performance during the quarter?

Brian Harris, CIO

No.

Jade Rahmani, Analyst

Great. Thanks. Okay. Thank you.

Operator, Operator

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.

Brian Harris, CIO

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 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.

Operator, Operator

Thank you, sir. Ladies and gentlemen that conclude today's conference. Thank you for joining us. You may now disconnect your lines.