Realty Income Q1 2024 Earnings Call Transcript

Thanks Nate. Good question. I think what you're seeing here in the US is largely confusion around where the rates are going, when will the rate cuts materialize. And it's a function of what we've seen play out over the last six months in terms of mixed data that is causing this confusion. And the way it's manifesting in our space is this reluctance of sellers to transact at what is reflective of the cost of capital environment today. And so for us, this is one of the advantages we bring to the table as we play in multiple geographies and we are seeing much better risk adjusted return opportunities in Europe today, where the data has been a lot more consistent and therefore the ability to transact with potential sellers much more real. And that's kind of the reason why you've seen 54% of the volume manifest itself in Europe versus here in the US. And I suspect because your question was very specific around the current pipeline and what we think will happen in the second quarter, I suspect it will be a similar slant to the results. But I do believe that the second half of the year, we should start to see a lot more transactions materialize. You know, I know that the team is actually in conversations with multiple potential sellers, but the disconnect happens to be, you know, where that reservation price is for potential sellers. But we do believe that once the environment becomes a little clearer in terms of what's going to happen with rates and when will those potential rate cuts come to fruition, I think the transaction market in the US will catch up.

Sure. So the ones that we currently have on our watch list, Rite Aid that represents about 31 basis points of rent. It's still going through bankruptcy. We are very hopeful that it will emerge from bankruptcy soon. But like I said, it's a very small portion of our overall portfolio. Juan [Phonetic] is another one that was on our -- is on our watch list that represents 4 basis points of rent. And our expectation is that all six leases are going to be assumed at 100% recapture, just given the way that they're planning on emerging from bankruptcy. Every other name that's on our watch list is sub 4% in terms of you know names that are currently in bankruptcy. So it's a -- it's obviously a very, very small portion of our overall watch list. The ones that are not on -- not currently in bankruptcy, but continue to garner a fair amount of interest here internally is Red Lobster, the one that you just mentioned. We have about 216 leases. It represents 1.07% of our rent. The cash flow coverage that we have across all 216 assets is right around 2 times and 201 of these 216 leases happen to be part of a master lease.

So I just wanted to frame, you know, our exposure to Red Lobster before I go into some color around the name itself. You know I think of Red Lobster as a -- it's a pretty strange story. They have 700 unique locations. They garner 14% of the casual seafood concept, that is a very hard thing to do. And the fact that they generate north of $2 billion in revenue, if you look at it on a per unit basis, that's just right around $3.5 million per unit. So it's not a top-line issue as much as it is an operations issue. They've gone through several changes in terms of ownership. Obviously, there have been several changes in terms of management. And this is a business that in our opinion hasn't been very well run. If you look at the balance sheet, is it a balance sheet issue at Red Lobster? In our opinion, it's not. They have $220 million of debt, and this is really a question of, is there an operator out there that could come in and basically manage this business even to reasonable level of margins, you know. Today, I don't believe they're generating a whole lot of EBITDA, but having said that, you know, our 200 assets has 2 times coverage. So that should tell you that we obviously have assets that are some of the best assets in their portfolio. And so if this can be operationally rightsized, we believe that this is a concept that should come out and should survive and do quite well given the footprint that they've been able to establish. So that's our view. We are keeping a close eye on it. As far as rents are concerned, we've collected 100% of the rents due to us as of May. So it's a wait-and-see, but it does happen to be on our watch list.

Sure. Good question, Greg. So what we are hoping to achieve is circa $400 million to $500 million of asset dispositions this year. We can't be very precise around it because part of it is a function of the market. We expect that the occupied sales and the vacant asset sales is going to be approximately 50-50. Obviously, in the first quarter, it was disproportionately vacant asset sales. I think $82 million of the $96 million was vacant asset sales, $14 million were occupied. But what we are trying to do is intentionally get ahead of some of these assets that happen to be on our watch list. And not always is it being driven by a credit issue. It's -- sometimes it is purely a real estate issue that our asset management team has concluded, does not have a long-term position in our overall portfolio. And then there are certain trends that we are seeing that we want to try to get ahead of based on client conversations, etc., that is also going to allow us to be a lot more proactive and get ahead of situations well in advance of it becoming an issue downstream.

In terms of the actual concepts themselves, it is along the lines of what we have been selling. Some of it is automotive services. There are some drug stores that we believe are not part of the overall strategy. Some of it is going to be the Cineworld assets that, by the way, the sale process is going, I would say, ahead of what our expectations were. And then some that are perhaps not, like I said, core to what our overall strategy is on the discount store side as well that we want to try to get ahead of. So those are the components that will make up what we want to try to get disposed of this year.

Look, we've got to execute our plan based on what we believe is the right portfolio that's going to take us into 2025 in a position of strength. We have grown our business through M&A. There have been two very large M&A deals done in the last 2.5 years, three years. We've been, I believe, very open about not all of those assets have been core to our long-term strategy. And so some of this is largely a function of trying to get back to that core portfolio. We have obviously underwritten the impact of 50% of circa $400 million to $500 million in dispositions being occupied assets. But what you'll find is some of these assets are actually being sold. Look at what we sold -- and I know it wasn't a big number, but the occupied assets, we actually sold them at a 7% cap rate, cash cap rate, and we are reinvesting it at 77% [Phonetic]. So it is actually an accretive disposition strategy that we've been able to implement at least for the first quarter.

So for us, it's about creating the portfolio that we want to go into 2025 and beyond with. And this is a program that will consistently be executed on going forward. When we are doing sale leasebacks, it's not an issue. When we're doing portfolio transactions on existing leases, not always do we get 100% of what we want. And so being a bit more proactive around culling the assets that is not core to our overall strategy upfront is something that I think we are going to be a lot more intentional about. But we feel very good about our ability to continue to grow despite the strategy in 2025 and beyond.

Hey Farrell, on the bad debt number, so we did disclose in the earnings press release for Q1, it was about $1.4 million that we actually recognized. As we think about forward-looking guidance and downside scenarios. I think we've been pretty clear in the past that we've been extremely conservative. I think when you sit here today, early May, it's a long time to go before the end of the year, it's not to say that there's any major concerns. I think you heard Sumit talk about the watch list and it's a bunch of small little things that if everything when they are right, yeah, maybe it could have some impact, but it's certainly not our expected scenario on that front. And so I think it's really a mix of spirits assets that we did acquire that we've always been a little bit more cautious on, and we'll continue to be cautious until we get further into the year. I think for us, we're always pretty conservative as it relates to bad debt expense, especially early in the year. And then finally, there's some identified credits that we are more draconian [Phonetic] on.

No, it's a matter of timing, Farrell, you know as the older vintage developments start to roll off, you'd start to notice that some of the newer developments that we've entered into are more reflective of the current cost of capital environment. and therefore, the cash cap rate yields that we are expecting on that vintage should creep up. It's just that we entered into our development pipeline 12, 18 months ago. And some of those assets obviously were more reflective of the environment that we were in at that particular point in time. But even at a 7.2% cash cap yield, which is what our development is -- that closed in the first quarter yielded is still circa 150 basis points, 170 basis points of spread. So yes, it's not quite the 78 [Phonetic] that we were able to achieve on the overall and certainly not 8.2% that we were able to achieve in Europe. But that -- I just wanted to make sure that you are aware that there is a bit of a lag on the development pipeline and the developments that we are entering into today is much more reflective of the environment today.

Yeah Brad, what the cost of debt is certainly lower in Mainland Europe. It's not lower in the UK. I would say trying on top of each other, Jonathan. Jonathan is nodding. So the big difference that we see and why potential sellers are willing to transact at the yields that we were able to realize, they're twofold. One, there are funds that have had redemption pressures where they need to monetize real estate, and they are more than willing to reflect what the current cost of capital environment is because they need the capital. And the second, which works really in our favor is the fact that we have established ourselves as the go to buyer of these types of assets. and recognizing that the surety of close, which is very important for these potential sellers is going to be met. And that reputation really does accrue to our benefit when we are sort of having these conversations, and somebody requires capital near term, and we have the ability to close on these transactions as and when we agree on a particular price. I think it's those two factors that's allowing us to be very successful in the UK and in Europe, and is how it's playing out.

Here, unfortunately, you don't have similar pressures. Yes, there could be operators that might be willing to transact. But if they have any ability to wait, which in the US, they have a lot more alternatives, they are sort of standing on the sidelines waiting for the environment to improve for potential buyers to then be able to get the cap rates that they're willing to transact in. So I think that's how I would frame why we are being successful. One of the reasons is obviously very idiosyncratic to us and the other is it's a reflection of the market.

Yeah, look I don't think that the impact for us is going to be disproportionate. We have about 3.3% of our rent, that is Dollar Tree/Family Dollar exposed to Dollar Tree, which obviously is the owner of Family Dollar. And I would say about 60%, circa 60% is Family Dollar and the rest of it is either Dollar Tree or the dual banners that they have. There's about -- I want to say 3% of the 3.3%. So that's 9 basis points of lease expirations over the next two years, 2.5 years that will materialize. So even if there are these closures and even if some of these assets are named on the closing list, our impact is basically 9 basis points. And I can assure you that our asset management team is already working on resolutions given that it is part of the pipeline. Anything beyond that will potentially be closed and will remain dark. We are still going to collect rent. And let me tell you that the pressure on Family Dollar and Dollar Tree is going to be a lot more acute than it is on us. to try to find a substitute to step in and take over these leases. And just episodically, there's a fair amount of interest in some of these locations that we've received just along the lines of some of the news that's out there about potential closings, etc. that we feel pretty good about our ability to resolve the Family Dollar assets.

The one thing I'll add, which may not be apparent, Family dollar tends to be in urban areas and in much more densely populated areas than Dollar Tree or Dollar General. And so the attractiveness of those locations to alternative retail clients is a lot more -- and that's borne out by the fact that we have received inbound. So for us, this is no different than learning well in advance that, hey, these particular leases are not going to get renewed and it gives us time to work on some of these leases well in advance of the actual lease expiration. So that's how I would frame it.

Sure. That's a great question. For us, free cash flow is a massive advantage. The ability to raise $825 million of free cash flow post all obligations is essentially capital that we can use to invest across a variety of areas to accretively grow our earnings. Obviously, when we have free cash flow, we have to figure out what is the best use of that free cash flow. We could buy back our debt, we could buy back our stock, we could continue to invest accretively. And when we find that investing accretively is the best possible use of that capital -- that is a massive advantage. And in a year where we are highlighting the fact that we have $2 billion of acquisitions, and we hope we do better than that, but that's our current guidance. Being able to finance this business with $825 million of free cash flow which is obviously non-dilutive in nature and grow our earnings is a massive advantage. That's how we think about our free cash flow. There is obviously opportunity cost associated with this. But the way we think about opportunity cost is what's the best use of this capital. And for us, even in this environment, given the platform that we have, and given the diversification benefits of being able to invest across multiple asset types across multiple geographies, we are continuing to find accretive use of this particular cash flow.

And I think, obviously, one of the other things that we do look at is what is the long term overall return profile. And that is what we compare to our long-term WACC, which is our cost of equity, that 65% and our cost of debt that is 35%. And the cost of equity -- and by the way, we have a few pages on this in our investor deck. It's largely driven by the CAPM model and the dividend growth model. And I think we take the average of the two to come up with our cost effective long-term cost of equity and the long-term cost of debt and it's 65%, 35% weighted. And all of our investments need to meet that hurdle rate and exceed that hurdle rate for us to move forward. So that's really how we think about our cost of capital and how we specifically think about the free cash flow, which obviously we view as a massive advantage to us.

We do. Any new development that we are entering into, and I think somebody asked this question as well, we should -- it should be more reflective of the current cost of capital environment. And so as you know, a lot of these developments, they do have a bit of a lag time. And so what you're seeing close today is in that lower 7% ZIP code. But what you should see translate over the next few quarters is to see that cash cap rate continuing to trend much higher, reflecting the current cost of capital.

Yeah, so a lot of these were retail parks. And let's talk a little bit about retail parks because there's a confusion when you say multi-tenanted, we think in terms of what -- how we define multi-tenanted here in the US. This is not like multi-tenanted here in the US. A lot of these are I would say 80% of them are Tier 1 or Tier 2 as we define them, clients that we are pursuing on a freestanding basis. And they happen to be located in a contiguous part. And each one of these units basically has a flow through from rent to NOI, very similar to what you would find on a freestanding basis. So the growth in these leases, they tend to be shorter, anywhere between five to 10 years. And the growth in these leases could be open market reviews or they could have some of the larger boxes could have more of the regular way growth that we've seen that are tied to inflation, etc. But when we are underwriting these assets, we are looking at the composition of the tenants. We're looking at the flow through. We're looking at are these rents above or below market? We're looking at what the long-term profile of the return is going to be.

And then we are comparing it to what are we getting these assets at day one in terms of the initial yield. And these assets have really done very well. And some of the numbers, a lot of the renewals come strong, these retail parks that we bought because the freestanding assets haven't gone through a renewal process yet. And the fact that they are very similar in nature to our overall portfolio of 104.2% that we were able to generate this quarter is a reflection of how we are underwriting each one of these retail parks. But that's where we are seeing the value. And the fact that we are now starting to consolidate and control swaps of retail parks across the UK is a massive advantage for us because the kind of conversations we can have with clients that we've obviously wanted to grow with is very different when we control major locations that they would like to continue to stay over the long duration.

And I think that's how we are able to generate the value that we are able to generate. And we are doing it at a time, point in time where should be told retail parks are starting to change. If you look at the vacancy that you have, it's circa 2%. If you look at the actual growth that we are being able to generate, it's much higher than what was traditionally achieved. And if you also look at the free rent concept that used to exist, we are being able to compress on that concept, just given the fact that we control so much more of retail parks. So this has been a great investment for us. And I just want to make sure that people realize that the flow through is very similar to a stand-alone net lease business that we've traditionally been involved in. So I'm glad you asked the question, Anthony. Thank you.

Yeah, so look we've gone through one of them already with Cineworld. AMC represents about 1% of our rent. We have, I believe, 39 assets. AMC continues to be able to raise capital in the equity markets. And '24 is not going to be a great year for the box office. We recognize that. It may be equivalent to last year, maybe it will be even a little bit less than last year given some of the disruptions that occurred in 2023. But the expectation is that 2025 will supersede 2023 and the quality of movie releases will be much higher in '25 than in '24. Is it possible that AMC goes through a BK process? Yes, it's absolutely possible. But I can tell you, our experience on Cineworld gives us a lot of confidence that the assets that we have and the resolutions that we've been able to achieve and the restructuring of the rent that was achieved is still going to create an outcome that is very acceptable to us.

Tony, just to put things in perspective, our history, and we've had several bankruptcies in our history. Our recapture rate has been north of 80%. And I believe if we were to do the full analysis, once we go full cycle on the Cineworld, it's going to be in that ZIP code. And it's not actually even better than that. given some of the resolutions that we are finding on the vacant asset sales that we had touched on last year on Cineworld. So I believe AMC is going to be a similar story, but it is not [Indecipherable] that they're going to go through a BK process, we believe they have enough liquidity to certainly withstand this year and potentially most of next year as well. But if they were to go through a BK process, it's not necessarily a bad thing. I think it will allow them to restructure the debt, which I think continues to be a massive burden and they will emerge stronger for it. And we believe that, again, just like in the Cineworld situation, we have some of their better assets and we will do fairly well even if they were to go through the BK process. So that's our thoughts on AMC.

Hi Haendel. I'm sorry, it was very difficult to hear you. But I think what you're asking for is, do we expect to accelerate the investments in the latter half of the year given what we are seeing today? And if I didn't quite get that, I apologize. But the answer is, look, we are not trying to look for a particular quantum of acquisitions or investments, we are allowing for the market to dictate how much we'll be able to achieve in a year, which is very uncertain. If you're asking for an opinion, I do believe that especially here in the US, the second half of the year, when there is a little bit more clarity in terms of where interest rates are going, etc., there will be more opportunities. And Haendal, if you look at what we've been able to achieve over the last few years, we tend to get more than our share of the volume, especially of the product that we are interested in pursuing. And so is it possible that the US acquisition numbers for the remainder of the year is going to be higher than what we achieved in the first quarter, the answer is yes. We certainly do. Do we expect the European momentum to continue? The answer is, yes. Do we expect both these markets to accelerate? The answer is, yes. And I just want to caveat it that this is our opinion, and time will tell. But we feel fairly optimistic about the second half of the year.

That was a loaded question, Haendel. But thank you for asking. The number is, I believe, closer to $11 billion. Yes, if we were to spin that business out, it would be one of the largest REITs in the UK. But that is absolutely not our intention today. We are very happy with having Europe as part of our overall platform precisely for the reasons that we talked about on this call regarding the first quarter, it allows us the opportunity to play in markets where we have the best risk-adjusted return profiles of investments. And therefore, all of that benefit accrues to our shareholders here in the US. And -- so that's how I'm going to leave it. Again, was this a grand design that we would grow up to $10 billion? No. It's again a function of the platform that we brought in, our cost of capital, our team and their ability to execute unlike any other teams and our ability to form the relationships as quickly as we did and now we consider the de facto net lease company in all of Europe. I mean those are benefits that has taken us five years to establish. And now we feel like is the time for us to continue to harvest the benefits of establishing ourselves in Europe. So that's how I would answer it.

Thank you for your question, Nick. Yes, I would say about 6% of our investments in the first quarter went towards the digital JV that we have formed. As you may recall, Nick, that is an asset that is being currently developed in Northern Virginia, in Loudoun County. And it won't be operational until the end of this year, the first phase, maybe -- actually, it's the first quarter of next year. And then there could be the second phase that gets kicked in. So as of right now, that is the only investment that we have on the data center side. There are other opportunities that we are looking at. We do have an investment that we will make, we will continue to make in Spain, that is also looking at a data center side that we believe is very well located, and there seems to be a lot of interest in that particular side. That will be our additional spend on the data center side, but that hasn't been substantial to date. But those are really the only two opportunities that we are looking at. We are obviously involved in multiple conversations with multiple operators to try to understand where the real opportunities are versus the optimism that continues to play out in this particular space. And we are hopeful that we can grow our high percent part of our portfolio in a meaningful way over the next few years. But as of right now, a lot of it is just in the initial stages of conversations with potential operators outside of the JV that we have with digital.

On the gaming side, things continue to look interesting. We've obviously made two investments. It represents slightly north of 3% of our rents and we are in conversations with other opportunities, including potential development opportunities in large cities. There's a very long tail to some of these development opportunities. But we'll see how some of these conversations translate into actual transactions. But I will say that there was an interesting conversation we were having earlier this year, which has been kind of put on hold for right now that would be a continued growth of our gaming business, but it hasn't quite materialized yet. So we'll see how that plays out.

Yeah Wes, we continue to look for opportunities on the credit investment side. But please keep in mind that one of the things that's dictating our investments in the credit side is to continue to strengthen relationships with either existing clients or to help facilitate sale leaseback with those existing clients. And if we want to be viewed as a real estate partner to some of the world's leading operators, part of being that partner is to provide capital through the traditional channels that we have established or on a more secured basis to balance sheet lending. And that continues to be how we think about our credit investment. But one of the advantages of doing this Wes, as I'm sure you recognize is this continuous headwinds that we experienced, given refinancings that we are having to incur at much higher rates. This is a perfect natural hedge to that because here we are lending to clients that we have credit exposures to reflective of the current higher interest rate. And that's really part of why we believe that this is such a good strategy for us in the interim. People talk about reinvestment risk. Well, guess what, if the environment is different and interest rates actually go down. We don't have to roll our credit. We will -- our cost of capital should be better, these headwinds that we are facing on our refinancings will dissipate. And we'll be able to, therefore, invest it in more of our traditional sources, this capital that we get back at very good yields. And so really, I think of the credit partly as a defensive mechanism and as a natural hedge to the headwinds that we faced, but also very much in line with trying to become that real estate partner to the world's leading operators, and these are operators with whom we want to continue to grow our relationship.

Yeah, we do have SOFR-based loans. But by and large, what we try to do is not expose ourselves to the floating rate element. We try to lock it in, we get it but then no longer becomes a perfect hedge. But given where the environment is and given the expectation of interest rates, we are still very well protected. We have one loan, the Asda loan that was -- it was -- it's a floater and it's off of the [Indecipherable] in the UK. But largely, every other loan that we've made has been a fixed component to it. And keep in mind that we also inherited some loans, one of which actually got paid off at 100% that we inherited from Spirit and it was a $33 million seller financing that Spirit had provided to imagine, which, by the way was an outcome that was superior to how we had underwritten it. So yeah, it's -- Jonathan, do you want to add something?

Yeah, well just to add to that, when we think about it in a natural hedge, I think it's more so a lot of lines of lenders that actually matures because we look at our maturity schedule, we've got a decent amount of debt coming to well staggered, but on a nominal basis, still pretty significant $1.9 billion next year, for instance, or $3 billion in '26 and almost $3 billion in '27. And so when you have a corresponding asset that could get cold or will get repaid and it's hard to replace that coupon in a lower rate environment, chances are we're much better off as we're refinancing our liabilities and our cost of capital is obviously much lower. So I think that's another way to take through the natural hedge element.

We are certainly seeing sale leaseback opportunities. In fact, 13% of what we closed in the first quarter, it was sale leaseback. But you're right, Harsh. If you compare it to last year, 46% of everything we did was sale leaseback. The year before that, it was closer to 40%. And we are not seeing that. And I think part of it is because clients are trying to figure out ways to not necessarily lock into 20-year, 25-year leases at these elevated cap rates. And so if there is an alternative available to them, be it through the debt markets, which has much shorter duration, even if it is higher, I think they're going to be far more inclined to doing that. But I just want to be very clear that we are -- again, if it's a brand-new client that we don't have a relationship with, we are not going to go and provide them credit if there isn't a compelling sale leaseback opportunity with them and our desire to have them as part of our client [Indecipherable] it is not there. We are not going to be pure credit providers like some of the credit funds out there that exists. So I do see that changing as there is stability in the rate environment as people start to get much more comfortable about where things are going to sort of play out. I do believe that sale leaseback will come roaring back. We are in discussions with some names right now. And it really is a disconnect between where they want to transact and what -- where we are capable of transacting given our cost of capital. So -- but I think it's a matter of time.

Thank you Harsh.

Yeah, that's where the secret sauce is, Linda. But all right. Let me -- and I don't want to get too pedantic. So try to keep it pretty high level. The way our predictive analytics work, it is by industry and even at times it is by client, but largely the models work by industry. And it tries to identify the key variables, which could be 20, 30, 40 variables that dictate the predictability of a renewal outcome or a leasing outcome. So the pieces around how we created the predictive analytic tool was to figure out what was our leasing activity going to look like where will we -- the risk was defined as, are we going to be able to maintain the rent that we currently have during a renewal period or are we -- is it going to go less or is it going to be more? And that's how we define risk, and that's how we've sort of created these algorithms by industry to identify where does risk lie in our portfolio. And as you can imagine, each industry has its own set of variables that dictate that particular outcome. But the biggest piece of all of this. I think the creation of the algorithms, etc., is a fairly simple task. I mean it's taken us 3.5, four years. So I don't want to minimize that piece. I've got [Indecipherable] looking at me strangely here. But it is the data that we have that allowed us to back test these models and continue to refine and calibrate these models to improve their predictability. I think that's what is whether the true value lies in our platform, having been around for 50 years. And I think that's why you see the kind of results that you see when we are posting the release -- the re-leasing spreads, when we are trying to get ahead in terms of identification of assets that we should, where we are maximizing the return profile of those assets given what we think will happen some lease renewal.

I think that's where the predictive analytics tools, along with the asset management team was using on the ground experience to sort of share their perspective along with the credit view, that group together is what's dictating how we try to stay ahead with the portfolio. And it's -- it has to be tools driven. It has to be technology driven. When you have 15,400 discrete locations with 80 different -- in 80 different industries with 1,500 different clients I mean it can't be done manually. And so that's the reason why we chose to make this investment Linda five years ago and several millions in -- this is a tool that we are very, very proud of. And it's now very much part and parcel of every decision we are making. Be it acquisitions, be it disposition, the hold decisions and also, this tool is now being used to dictate the highest and best use for potential vacancies, which may or may not be the old use of that particular asset. And we've seen some of the value creation that, that prediction has yielded for us as a platform. So hopefully, I didn't get too much into the details, but that's really how the predictive analytical tool works.

Yeah, for us having geographical diversification, the advantages of it played out in the first quarter, right? I mean you saw we were able to find transactions in the UK that had a return profile that far superseded what we are able to find here in the US. And then that will flip -- so I think the geographical diversity is a good thing. In terms of the actual composition of the portfolio, we clearly have what we are viewing as an optimal portfolio. and an optimal portfolio, we might like, let's call it, grocery. But we want grocery to be 13% to 14% of our overall portfolio. If that creeps into the 19% to 20%, that's not a good thing. And by the way, I'm giving you an example, that's not the case. Grocery happens to be only 10% of our portfolio today. And then there are other areas like apparel that we may not necessarily want to be exposed to at all. But again, using very broad brushes across particular subsectors is not the right answer either. And that's the reason why this tool along with credit, etc. they help us devise what we believe to be the optimal portfolio. If you think retail and you step back, we like service oriented businesses. We like low price point businesses. And -- that's sort of the overarching non-discretionary overarching elements that we look for on the retail side. That doesn't mean that we won't deviate from this. But over 90% of our retail portfolio, by the way, has one or more of these characteristics. But that's, I think how you think about the composition and geographical diversification is something that sits on top of that.

Thank you all for joining us today, and we look forward to speaking soon and seeing you at the upcoming conferences. Thank you.