The Latticework Letter — Issue #010

Last week the story was that a direct Treasury intervention in the long end bought exactly one day of relief. This week the long end got real relief — and it came from a place no one at the Fed or the Treasury controls: the Strait of Hormuz.

Reports landed Tuesday that Iran and Oman are discussing a "temporary joint maritime corridor" through the strait, with technical talks continuing toward a permanent arrangement covering traffic management and security services. Washington's latest pressure package also proved less aggressive than feared, stopping short of secondary sanctions on Iran's trading partners. Brent fell nearly 4% Tuesday to settle below $89, its lowest in over a week, and extended toward $86 Wednesday — a third consecutive session of declines, down from above $94 a week earlier.

The bond market did the math immediately. The 10-Year, which had touched a twenty-month high around 4.75% late last week, dropped nearly ten basis points Tuesday, settled around 4.64%–4.66% Wednesday, and sat near 4.68% Friday morning. No buybacks required. The takeaway from the last two issues still stands — supply worries own the long end — but this week added the corollary: the fastest-moving input to your discount rate right now is a geopolitical negotiation, not a monetary one.

The data was quietly two-sided. The second estimate of Q2 GDP held at 1.5%, but consumer spending was revised up to a 3.4% annualized rate and real final sales to private domestic purchasers to 4.2% — the economy's engine is still the consumer, running faster than the headline suggests. Initial claims fell to 203,000. Yet the Conference Board's August confidence index slipped to 89.4, and the composition is the story: the Present Situation index jumped 6.8 points to 121.2 while the Expectations index fell 5.8 points to 68.2, with the share of consumers calling a recession "very likely" ticking up. Consumers think today is fine and tomorrow isn't. More on that below.

Markets now put the September hike at roughly 31%, down from about 52% a week ago and 82% in mid-July. Warsh — who described his Jackson Hole speech after the July meeting as "a blank piece of paper" — gets the podium Friday morning, nineteen days before the September 16 decision. By the time you read this, the paper has writing on it.

Last issue ended with a question: if Walmart is spending a $2.9 billion tariff refund to defend traffic, what does that mean for everyone below it? This week the dollar stores answered, and the answer is that the trade-down is no longer a thesis. It's a print.

Dollar General reported Thursday morning: net sales of $11.29 billion, up 5.2%, same-store sales up 3.5% with growth across all four merchandising categories, and net income of $550 million — up 33.8% — for EPS of $2.48. Guidance went up across the board: fiscal-year EPS raised to $7.80–$8.00, comps to 2.5%–2.9%. The stock closed up about 2.5% Thursday. Dollar Tree reported the same morning: sales up 7% to $4.89 billion, GAAP EPS of $2.70 well above consensus, full-year comps guidance of 3%–4%, and adjusted EPS raised to $6.70–$7.10. Set those against Walmart's 2.6% U.S. comp — the slowest since 2020 — and the picture resolves: the customer isn't disappearing, she's migrating down-market, exactly as the sentiment data said she would.

Now look at the real estate, because the pricing is the interesting part. The most recent tenant-level data has Dollar General trading around 6.75%–7.05%, Dollar Tree near 7.6%, and Family Dollar at 7.80%–8.20% — all above the 6.60% single-tenant retail average in Boulder's most recent quarterly survey. Compare that to last issue's drive-thru coffee pads clearing below 5.25%. The market is paying a 135-basis-point premium for a startup coffee brand's growth story and demanding a discount to own the sector that just raised guidance in a consumer recession-scare. The reasons are structural, not irrational — thin rent, rural locations, commodity boxes with limited re-tenanting depth, and flat primary-term leases — but the spread between the category's operating momentum and its real estate pricing is as wide as anywhere in net lease.

And the supply keeps coming. Dollar General plans roughly 450 new stores in 2026 (including ten in Mexico), 4,250 remodels, and $1.4–$1.5 billion of capex, with new locations predominantly rural. Dollar Tree plans about 400 openings against 75 closures. That is two developers' pipelines worth of new NNN product a year, mostly in markets where the dollar store is the only national credit in town. The category's risk was never demand. It's that your building is a $1.2 million commodity box whose residual value depends on the one tenant that builds them faster than anyone else. Note also the divergence within the category — roughly 100 basis points now separate Dollar General paper from Family Dollar paper. The market has stopped treating "dollar store" as one credit. So should you.

Wendy's completed a full round trip in fourteen days. August 12: reports that Trian was assembling a take-private consortium with BlueFive Capital and Flynn Group sent the stock up as much as 15%, briefly halted for volatility. Wednesday: reports that Trian has no plans to make a bid "right now," with recent trading levels and valuation multiples dampening enthusiasm — and the stock closed Thursday down about 13%, at $7.90. Last issue we flagged that no formal offer existed and timing could slip; it slipped all the way to nothing, for now. The operational facts that made the story matter haven't moved: six quarters of declining same-store sales, a U.S. president departing August 31, a COO seat being rebuilt, and a filing that says the company "is evaluating restructuring and reorganization efforts." If you hold Wendy's paper, the take-private premium was never your asset. The restructuring risk was always your liability.

Kohl's delivered this week's earnings-quality lesson: net sales fell to $3.32 billion, comps declined 0.9%, EPS slipped to $1.28 — and the full-year outlook went up, courtesy of a one-time tariff refund. The stock fell about 5% anyway. That's the same refund Walmart is receiving, deployed differently: Walmart is spending its $2.9 billion on price to hold traffic; Kohl's is letting its refund flow to guidance. One of those choices builds market share, the other builds one fiscal year's optics. Landlords with department-store exposure should read the sales line, not the EPS line.

Best Buy was the upside surprise: revenue $9.78 billion, up 3.6%, comps up 4.1% against its own guidance of roughly 1%, EPS of $1.47 ahead of estimates, and a raised outlook. A durables retailer comping 4% while consumers tell surveys a recession is "very likely" is worth filing away — the replacement cycle in electronics has a pulse.

Salad and Go got its process. The court approved an auction for the 82 remaining leases not covered by the Dutch Bros agreement, split into two sessions: October 1 for Arizona/Nevada and October 2 for Texas/Oklahoma. Stalking-horse letters of intent were due August 28, and the hearing on Dutch Bros' original 51-site, $105 million purchase is set for September 1. 7 Brew continues to argue it offered better dollar-for-dollar value. Last issue we said process design would decide landlord recoveries here — the ~100 leases we tracked then have resolved into 82 heading to open auction, which is the better outcome for the owners of those buildings. September 1 tells us whether the exclusive deal survives contact with a courtroom.

On the calendar: America's Car-Mart's covenant waiver period expires September 7 — ten days out — extendable to September 21 or November 6 under conditions. No new 8-K this week. This is now the nearest-dated credit event in net lease.

That is the Conference Board's Expectations Index for August — consumers' short-term outlook for income, business, and jobs — down 5.8 points. The convention among economists is that a reading below 80 has historically signaled recession ahead. It has now been below that line for months.

Here's what makes the number worth your time: the Present Situation Index went the other way, rising 6.8 points to 121.2 after three straight monthly declines. The spread between how consumers say things are and how they expect them to be is now roughly 53 points. People are telling surveyors, in effect: my job is fine, my spending is fine — the 3.4% consumption revision in Wednesday's GDP report says they mean it — and I don't believe it lasts.

For a net-lease owner, that spread maps directly onto the two halves of your underwriting. Present conditions pay this month's rent; expectations sign next year's leases. Tenants make expansion commitments — new units, renewals, capex against a fifteen-year term — with the expectations side of their brain. A consumer economy running at 121 on the present and 68 on the future is one where rent collections stay clean while development pipelines, franchise commitments, and renewal appetites quietly thin out. Watch the announced-openings numbers this fall, not the sales comps. The comps are the past; the openings are what 68.2 decides.

There's an old statistician's joke Munger liked the shape of: a man with his head in the oven and his feet in the freezer is, on average, comfortable. The serious version is a rule — never accept an average when you can get the distribution — and this week was a clinic in it.

GDP grew 1.5%; inside that average, consumer spending ran 3.4% and government spending shrank. Consumer confidence read 89.4; inside it, the present ran 121 and the future ran 68. Retail is "holding up"; inside that, Walmart comped 2.6%, Kohl's comped negative, and Dollar General comped 3.5% and raised guidance — the average consumer doesn't exist, only a bifurcated one trading down the price ladder. Even net lease's own headline — a 6.60% average retail cap rate — dissolves on inspection into coffee pads at 5.25% and Family Dollar at 8.2%, a three-point spread inside one "asset class."

The reason averages seduce is that they compress. One number feels like knowledge; a distribution feels like homework. But every decision that matters in this business happens in a tail. You don't own the average dollar store — you own one box, in one town, with one tenant whose one credit committee will make one renewal decision. The bankruptcy process we've tracked for three issues makes the point brutally: Salad and Go's leases will not recover "an average" — 51 of them got an exclusive $105 million deal, 14 got fifty dollars, and 82 are going to auction. Same debtor, same month, same asset class. The distribution is the outcome.

The practical discipline is a question to ask of every statistic in every broker package: what would I see if this number were unpacked? Average remaining lease term across a portfolio — what's the shortest? Average household income in the trade area — what's the median, and what's the bottom quartile that actually shops the store? Average historical occupancy — which years, and who paid for the vacancies? The sellers of assets traffic in averages because averages are where the flaws go to hide. The buyers who last are the ones who keep asking for the list.

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.