George Gleason: Yeah. I mean it’s going to depend on what loans are maturing and coming up for extension either as-of-right extension because our as-of-right extension provisions usually have a loan-to-value requirement in them and — or what are coming up for extension that don’t have an as-of-right when we’re going to get an appraisal. Or what’s a loan that is getting some attention on our part that we feel like we need to reappraised. So there are a variety of reasons you get an extension, get an appraisal. But that’s — there’s nothing unusual. Let me say it that way. There’s nothing unusual about volume. It’s just the normal way we would do that. Now if you factor in the originations over the last 12 quarters, that’s another 25% of the portfolio. So what that tells you is something 40% to 50% of the portfolio has a [fresh appraisal] (ph) within the last 12 months on it, which is probably pretty typical.
Brody Preston: Got it. Okay. I appreciate that. Suffice to say, though, based on the stats we can see, George, it’s about 15% has been reappraised so far on our end and the average change in the loan-to-value is a little less than 3%?
George Gleason: Yeah. And again, I would point out that, that average change of 3% is after substantial paydown. We get an appraisal if the loan-to-value is materially different than what it was at origination or doesn’t meet the as-of-right extension requirements. Our sponsors in many cases, are coming to the table with paydowns on those loans to reduce them back in line with our extension criteria requirements. So the 3% is a really good number, but it’s a result of appraisals plus paydowns and that are reducing those balances to back to a lower loan-to-value.
Brody Preston: Got it. And then last one for me is just — there’s been, obviously, everybody knows there’s been a big shift in the interest rate environment. I wanted to ask you kind of just given that 2021 was a big origination year and rates were still at 0, how do you guys, I guess, how did — what would you assume kind of cap rates? Like anything you can kind of give us on how cap rates were when you kind of underwrote these projects? Like what the assumed like exit cap rate was, how you kind of stress that in your underwriting? And I guess, how that compares to the current environment today, I think, would be helpful.
George Gleason: Yeah. We stress debt service coverage in 100 basis point increments, up 500 basis points using our loan and the projected performance of the project and projected of the performance of the project, we used the sponsors projections and run that right beside ours. So we’re looking at it under what the sponsor’s expectations are versus our underwriting expectations up 100, 200, 300, 400, 500 basis points. We look at exit refinance market conditions, what the current secondary market, permanent market refinance is for those up 100, 200, 300 and 500 basis points and then we look at cap rates, and take current cap rates for that property type and stress those up 100, 200, 300 or 500 basis points. So we underwrite for a lot of interest rate stress, and that certainly is what we have seen with the Fed moving the Fed funds target rate 525 basis points from the 0 lower bound.
So our methodologies there have been very sound and very helpful and very appropriate for the environment in which we find ourselves. So that’s, I think, that focus on how you can stress these loans and the solution is, if you really like a project and it doesn’t stress well enough, you just got to get the leverage down to where it does stress. And that’s one of the reasons we have so much equity in our projects and our leverage is so low as we are stressing these projects for a significant market risk. Including interest rate risk, and that’s played out. Now on cap rates, the interesting thing is cap rates have come up, but cap rates on property types such as apartments and industrial and life sciences have not moved nearly in tandem with Fed move.
So the magnitude of changes in cap rates over this period where the Fed has moved 500 basis points — 525 basis points — has been less than 525 basis points. It’s interesting to us if we see further movement in those cap rates going forward. And they ultimately catch up with the Fed. And I think that’s really going to be a product of are we permanently in a 5.25% to 5.5% Fed funds target rate environment? Is the tenure going to permanently readjust to high 4s, low 5s sort of situation, and we’ve had a fundamental shift. And if we’re in that environment two, three, four years from now, we see cap rates fully catch up with that. But right now, the cap rates seem to reflect the sentiment that at some point, rates are going to come lower to some degree from where they are now.
So that’s providing some degree of support to property valuations.
Brody Preston: George, what do you just say about the cap rates? You said you stress them up 300, 400 basis points. Does that mean that even in that scenario, when you underwrite that loan when you stress the cap rates to that degree, does the loan still perform and pay off when you kind of get to that left tail type event?
George Gleason: Yes. On the cap rate stress, is — best I can remember, I don’t think we have closed a loan that wouldn’t tolerate 500 basis points cap rate stress and still cover our loan. There may have been a handful of exceptions to that in the 300-and-something loans in the RESG portfolio. But the vast majority of them can tolerate that kind of stress on the cap rates.
Brody Preston: Got it. I appreciate that. I lied. I’ll sneak in one more. Do you have to know what the reserve on the office portfolio is at this point?
George Gleason: No. Nobody here knows that broken out specifically.
Brody Preston: Got it. Awesome. Well, thank you very much for taking my questions everyone. I appreciate it. Have a great rest of the day.
Operator: And thank you. And at this time, I see no further questions. I’ll turn the call back over to Chairman and CEO, George Gleason for closing remarks.
George Gleason: All right. Thank you, guys. We appreciate you joining the call. Thanks for the good questions. We look forward to talking with you in about 90 days. Have a great rest of the quarter. Thank you.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
