Michael referenced in our own portfolio, that 12% revenue growth we’re seeing strong revenue and EBITDA growth across our borrowers, and that is obviously helping companies in areas like technology are obviously looking at their cost structures becoming more profit-focused, and so I think it’s earnings growth that has supported this. I think it’s a fair question, which is, as you look out over time, if the economy does moderate as we expect, rates stay elevated? Would you expect more defaults going forward? And I think the answer to that is yes. But I don’t think this is like ’08, ’09. I don’t think we have the kinds of overleverage we had back then. And just to point it out, if you look at BCRED, our nontraded BDC, its average loan to value was 43% on its book.
And much of that, of course, was originated prior to this rate hike. And if you contrast that to the ’06, ’07 period when leverage levels were 70% plus I think that’s another reason people don’t focus on why you have more of a cushion here and less distress. So picture today on the ground, certainly better than people would expect. Going forward, we’d expect that things will get tougher but not nearly as bad as that last cycle.
Michael Chae: Jon, let me just add it on that. Mike, it’s Michael. Just focusing on our outperformance versus the overall market with respect to default rates, and it has been pronounced. It’s important, I think, to highlight sort of our relative position and focus. And our team would call it the three Ss, scale, sector selection and seniority. On scale, we’re obviously a large player. We are focused on larger issuers. And we believe, overall, it’s already been shown in a high inflation world. Larger companies are more resilient with respect to performance through the cycles. And again, that’s been shown, I think, in terms of more options to respond to a rising cost inflation environment recently. Second on sector selection.
If you look at our portfolio versus sort of the industry average, our focus in recent years away from cyclicals, some consumer discretionary companies, certain industrial companies, has I think really paid off. And then with respect to seniority, which Jon touched on in additional loan to value, 98% basically of our direct lending portfolio in BCRED is senior secured. And actually, even our peers in the direct lending area are substantially lower than that in some cases, 70%, 75%. And so that is the top of the capital stack, and that is very protected. So I think Jon talked about the overall sort of default rates in the path, and we do expect them to rise for the market overall and for us. But our sort of experience and outperformance on default rates, which has been both historical and current, I think, has some underlying drivers that are important to highlight.
Operator: We’ll go next to Glenn Schorr with Evercore ISI.
Glenn Schorr: Maybe big picture on real estate in general. I’m curious if where — the 10-year has been kind of in the same range for a while now even as we get in the last of the short-end rate hikes. So I think cap rates have levelled off as well. Maybe you could take a snapshot on where you think we’re at leverage-wise debt service coverage wise, and what the sales pitch for real estate in general is going to be if that’s an environment that we’re in over the next handful of years?
Jon Gray: Well, Glenn, I would say that there continues to be pretty significant bifurcation in commercial real estate. So we’ve talked about it in the past, certain sectors face real underlying fundamental headwinds that would be notably the office space in the United States, which we’ve talked about is less than 2% of our own portfolio. And there, I still think we have a ways to go in terms of what will be, I think, continued challenges going forward. And there will be more foreclosures and more markdowns coming in portfolios. We continue to see in a number of sectors, particularly our largest sector, logistics, very strong underlying fundamentals where rents are growing globally around double digits. Other areas like student housing with real strength, data centers, which we talked about in the remarks, again, real strength.
