The Latticework Letter — Issue #004

Last issue we left you with one instruction: watch Tuesday's CPI. Here is what you missed if you didn't.

Monday, Fed Governor Christopher Waller stood up in New York and said the quiet part: "If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term." The 10-Year jumped to 4.62%, its highest in roughly two months, and CME futures priced a 46.5% chance of a rate hike on July 29 — a near coin-flip.

Tuesday, the coin landed. June CPI printed at 3.5% year-over-year, down from 4.2% in May — the first cooling in five months — and fell 0.4% on the month, the largest one-month decline since April 2020. Core came in at 2.6%, down from 2.9%, flat on the month. Hike odds collapsed to roughly one-in-five by the afternoon and one-in-eight by Wednesday, when producer prices obliged with a 0.3% monthly decline of their own. The 10-Year finished Wednesday at 4.56% — a 6-basis-point round trip to end the week almost exactly where it started.

Before you exhale: read the internals. Energy fell 5.7% in June — the entire headline decline — with gasoline down 9.7% on the month yet still up 26.7% on the year. Strip the oil round-trip out and what remains is quieter but real: shelter rose just 0.1%, its smallest monthly gain since January 2021. Meanwhile the Fed's preferred core PCE gauge was still running 3.4% as of May, and Waller's own speech warned against "fighting the last war" — in both directions. The July 28–29 meeting is now a hold at 3.50–3.75% in all but name. What was a live question is again a waiting game.

For net lease, the takeaway is simple: the hike scare that threatened to rewrite the second half’s calculus just lost most of its teeth — for now. Cap rates that drifted a couple of basis points wider last quarter are unlikely to get shoved by the Fed this month. The shoving, as usual, is coming from the tenants. More below.

For two issues we have described a net lease market whose median trade is a few million dollars of drugstore or drive-thru. This fortnight, the checks changed size: a run of signings measured in billions — leases that rank among the largest the data-center era has produced, and that dwarf anything traditional net lease has ever put on paper.

On July 6, TeraWulf announced a 20-year lease with Anthropic at its Justified campus in Hawesville, Kentucky — roughly $19 billion in contracted revenue over the initial term, on a 401-megawatt site that used to be an aluminum smelter. On July 14, CleanSpark signed a 20-year triple-net lease at its Sandersville, Georgia campus with an unnamed "high investment-grade" global technology company: $6.6 billion contracted, up to $11.6 billion with two five-year extensions, first deliveries late 2027. And on July 1, Realty Income — the company built on 7-Elevens and Dollar Generals — committed up to $1.4 billion to a new Cloud Capital joint venture seeded with over $6 billion of hyperscale assets on long-duration, investment-grade triple-net leases.

Set that against the ordinary market: sales of single-tenant net-lease properties across the entire country totaled $12.9 billion in the first quarter, per Northmarq — most of them a few million dollars at a time. The contracted rent on one Kentucky campus is half again as large as a full quarter of national deal volume. The whale did not enter the pool. The whale is the pool.

Now underwrite it the way we underwrote the Broadstone build-to-suit last issue — on the day the tenant leaves, not the day it pays. A 401-megawatt data campus has exactly one class of replacement tenant, and every candidate on that list is currently building its own. The credit is spectacular; the residual is a question nobody can price, which is precisely why 20-year terms, investment-grade guarantees, and built-in escalations are non-negotiable in these deals. Notice, too, what Realty Income did in the same week it made that commitment: on July 13 it recast its revolver from $4.0 billion to $5.5 billion and doubled its commercial paper capacity to match. When the most conservative landlord in the sector raises its dry powder 40% while entering a new asset class, it is telling you two things — it sees the opportunity, and it wants maximum flexibility if the opportunity misbehaves.

For the individual NNN investor the actionable point is indirect but real: billions of institutional net-lease capital are being redirected toward data centers. Every dollar that goes to Sandersville is a dollar not bidding on your Dollar General. At the margin, that is one more reason quality small-format supply stays scarce — and one more reason the institutions may leave the sub-$10 million market to you.

Two weeks ago it was a Mountain Mike's operator and Popeyes' former largest franchisee. This week the tape printed three more times, and the pattern is worth reading closely.

On July 9, Superior Star LLC — a Phoenix-based Hardee's franchisee running 59 restaurants across the Midwest — filed Chapter 11. The trigger: a dispute over a $7.04 million seller note from its 2023 purchase of 93 units from Starcorp. Read that again: the deal was financed by the seller, at 2023 prices, and the operator has already closed a dozen stores. On July 14, a two-unit Checkers franchisee in Tampa filed with $1.8 million of debts against $569,000 of assets, revenue down 21% in two years. Small, but the anatomy is identical: borrowed money, shrinking sales, personal-scale balance sheet.

The third print is the one to study. On July 10, MTY Group — the Canadian franchisor that owns Papa Murphy's, Cold Stone, and 80-odd other brands across 7,040 locations — announced it will close 68 corporate-owned restaurants, 45 to 50 of them Papa Murphy's. Papa Murphy's had 49 company-owned units. That is not a struggling franchisee; that is the franchisor concluding that nearly every store it operates with its own money should not exist. The 68 closing units lost more than CAD $10 million combined over the trailing twelve months. When the party with the best information in the system — the one that sees every store's P&L — exits the real estate, that is disclosure. KFC, for scale, has now closed 207 U.S. restaurants since the start of 2025.

Last issue we said the franchisee QSR spread was a leverage story, not a demand story. This week adds the refinement: watch the vintage. Operators who bought units in 2021–2023 — at peak multiples, with seller notes and SBA debt — are the distressed class of 2026, the same way 2021-vintage CMBS is. If your tenant's guarantee traces to an LLC that did an acquisition in those years, the lease file you should be reading is not yours. It is theirs.

That is the size of the active retail construction pipeline as a share of existing inventory, per Cushman & Wakefield's second-quarter report, released Tuesday. Not 3% — three-tenths of one percent. Just 2.3 million square feet of retail space delivered nationally in the quarter, and retail vacancy sits at 6.0%, well below its 7.4% historical average. Asking rents rose 2.2% year-over-year. Net absorption swung back to positive 708,000 square feet.

Hold that number against everything you just read. S&P Global counted 372 large corporate bankruptcy filings in the first half — the most for any first half since 2010. And the closure lists get longer every issue of this letter: Hardee’s and Checkers franchisees in Chapter 11 this week, Papa Murphy’s closing nearly every corporate store, KFC and Pizza Hut each shrinking by a couple hundred U.S. locations, 7-Eleven planning 645 North American store exits this fiscal year. Note what is not on that list: a single major brand bankruptcy. The stress sits with operators and marginal locations, not the nameplates. And yet vacancy barely moves and rents keep climbing, because for fifteen years America has essentially stopped building retail. Every failed tenant hands back a box into a market with no new boxes.

This is the quiet machine underneath every "Tenant Watch" item we write. Tenant risk and real-estate risk are different risks. When supply is 0.3%, a bankruptcy is a rent reset, not a write-off — if the box is fungible and the corner is real. The operators are having their correction. The buildings, so far, are not.

Ben Graham said the market is a voting machine in the short run and a weighing machine in the long run. This week you got to watch both machines run on the same input, side by side.

The voting machine: on Monday the futures market put the odds of a July hike at 46.5%. On Tuesday morning a single data release — one month, heavily driven by a 9.7% drop in gasoline that is still 26.7% higher than a year ago — cut those odds to one-in-five by lunch. Billions of dollars of rate exposure repriced in four hours, on one print, whose largest component everyone agrees is noise. That is not analysis. That is a reflex — the availability heuristic wearing a Bloomberg terminal.

The weighing machine: your lease. A 15-year net lease with 2% bumps does not care about Tuesday. It weighed the tenant's credit, the corner's traffic, and the building's second life once, at signing, and it re-weighs roughly never. This is usually described as net lease's weakness — illiquid, slow, insensitive. This week is a reminder that it is also the point. The same inertia that keeps your cap rate from compressing on good news kept it from blowing out when Waller rattled the market on Monday.

The discipline is refusing to let the voting machine into your underwriting. The investor who re-underwrites on every CPI print is doing with property what the swaps market did on Tuesday — mistaking the vividness of the latest data point for the weight of the evidence. Five years of above-target inflation is evidence. One month of falling gas prices is a data point. The Fed knows the difference, which is why it will hold this month either way. You should know it too, because you hold for twenty years either way.

The market votes every day. Your lease weighs for twenty years. Buy things that survive the recount.

The Latticework Letter is published weekly on Friday mornings. It is independent analysis — we have no brokerage relationships, no listings to push, and no financial products to sell. Our only interest is giving you a clearer picture of the market.

Forward this to someone who owns NNN assets and is tired of getting their intelligence from people with something to sell.