The Latticework Letter — Issue #013

The debate is over. On Wednesday the Federal Reserve raised its policy rate a quarter point to 3.75–4.00% — the first hike since July 2023 — and it did it unanimously, 12–0. Last issue we wrote that the market was no longer debating whether Warsh hikes, only how many times. The Fed answered that too: the updated dot plot shows 16 of 18 participants penciling in at least one more increase before year-end, with meetings remaining on October 28 and December 9. The statement conceded that “uncertainty remains elevated” on geopolitics but noted domestic spending “has been resilient” — and then delivered the operative line: “Inflation remains elevated.” Warsh, at the press conference, was blunter: ”This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.” The man who told Jackson Hole that 2% must arrive “at sufficient speed” now has a committee — all of it — behind him.

The bond market did not wait for the press conference. The 10-Year, which we left last week “within shouting distance of 5%,” crossed it: 5% intraday Monday, roughly 5.02% Tuesday — the highest since July 2007 — and settled around 5.016% after Wednesday’s decision, with the 30-Year near 5.36%. Read that middle number again. The benchmark risk-free rate that prices every net-lease asset in America is at a level last seen when the iPhone was two months old and the average net-lease cap rate had a 7-handle in front of a very different market.

The energy tailwind that helped force the Fed’s hand did not let up either. Brent pushed to roughly $107.50 Tuesday, near a four-month high, with Saudi Arabia’s East-West pipeline still offline after last week’s attacks — the workaround route for crude avoiding Hormuz, now itself a casualty. AAA’s national pump average hit $4.37 Wednesday, up from $4.22 a week ago, higher in every state than the week prior. Stocks sold off into and after the decision as investors braced, in CNBC’s phrasing, for higher-for-longer — this time meaning higher still.

Two counterweights before you reprice your whole portfolio in your head. First, the deal market entered this storm with genuine momentum: CBRE’s Q2 count had net-lease investment volume up 13% year-over-year to $12.8 billion, and the early sell-side read on Wednesday’s hike is that it widens the gap between well-capitalized sponsors and overleveraged owners rather than freezing transactions outright. Second, remember the shape of the last cycle: cap rates lagged Treasuries by two to four quarters on the way up in 2022–23. The 5% 10-Year is not in this quarter’s comps. It is in next spring’s. What you do with that lag — as buyer or seller — is this issue’s recurring theme, and the sector below is where the lag is currently most extreme.

Net lease’s most instructive transaction of the year closed its auction this month, and almost nobody outside the docket noticed what it proved. 7 Brew agreed to pay roughly $143.2 million for 73 former Salad and Go drive-thru sites — 41 in Arizona, 20 in Texas, six each in Nevada and Oklahoma — outbidding Dutch Bros, which entered as a bidder and elected not to top, settling for backup-bidder status. The sale hearing is Monday, September 21; landlord objections were due Wednesday. Do the arithmetic the brochures won’t: that is about $1.96 million per box — for the real estate and leaseholds of a failed concept, paid by the fastest-growing chain in the category, with the second-fastest underbidding. Salad and Go the operator was worth roughly nothing; Salad and Go the corners were worth $143 million. In a sector where everyone underwrites the tenant, the market just printed a nine-figure comp for the dirt.

That is the essential fact about drive-thru beverage as an asset class, and this week’s Boulder Group Q3 Tenant Profiles report — 88 net-lease tenants, released Tuesday — frames the pricing around it. The market is bifurcating along credit and lease-structure lines: investment-grade ground-lease credit at 15-year terms is priced at or near historic tights — Chick-fil-A ground leases at 4.15–4.45%, McDonald’s at 4.35–4.65%, Wawa at 4.90–5.20% — while shorter-term paper and below-investment-grade operators gap wider: Applebee’s out 15 basis points to 7.15–7.45%, Burger King out 25 to 6.30–6.60%. Coffee sits astride the divide. Dutch Bros — still not investment grade — trades below 5.25% on the strength of unit growth (1,177 shops at the end of Q1, at least 185 openings planned this year), while a Scooter’s in a secondary market can print near 7%. 7 Brew, Blackstone-backed and franchised, is on pace to open 437 units this year and pass 1,000 by year-end — growth that has investors pricing its paper like a growth stock’s converts rather than a franchisee’s lease.

Here is the discipline, in three parts. First, the Salad and Go comp cuts both ways: it proves the box is fungible — a 500-to-900-square-foot stack-and-lane with a double drive-thru re-tenants to coffee in months, which is real downside protection no casual-dining box has ever offered — but it also proves the concept can die in eighteen months even after raising $27 million of rescue capital, as Salad and Go did between December and January before filing anyway. You are underwriting the corner and the format; the logo is a coupon. Second, run the spread math this week of all weeks: a sub-5.25% Dutch Bros cap rate against a 5.02% Treasury is a spread of roughly twenty basis points for a non-investment-grade tenant in a fad-adjacent category. That is not a risk premium; it is a rounding error. The Boulder bifurcation data says the market knows this for Applebee’s and hasn’t admitted it for coffee. Third, watch the supply thesis we flagged in #009–#010: 7 Brew alone is adding more than 400 boxes a year, Dutch Bros nearly 200, and every one of them is a build-to-suit that will hit the 1031 market at a 20-year lease and a tight cap. When the category’s growth decelerates — every beverage category’s eventually has — the last vintage of build-to-suits is the one holding rent 30% above the re-tenanting number. Buy the corner that works for the third tenant, not the first.

America’s Car-Mart reaches the cliff today. The Silver Point-led waiver — extended September 4 to the 11th, then September 10 to the 18th — expires this Friday morning, and as of Thursday night no third extension or transaction 8-K had hit the tape. The company continues to say its strategic review has made “significant progress” toward a transaction, with discussions active among third parties, the agent, and the lenders; the review, overseen by a special committee, spans financing, recapitalization, restructuring, and M&A. Meanwhile the vultures are visibly circling the equity: at least two plaintiff firms publicized ongoing securities-fraud investigations this week tied to the loan-modification disclosure issue, and the stock is trading around $1.65. For landlords holding the 94 operating dealerships, nothing about the real-estate posture changed this week — which is the point. Three waivers in three weeks is a lender keeping a borrower alive precisely long enough to sign something. Whatever gets signed, the store-by-store real estate triage continues either way. Watch the tape this morning.

Salad and Go goes before the judge Monday, September 21 for approval of the 7 Brew sale (details above in the Spotlight). Objections were due Wednesday the 17th. If your site is in the 73, your assumption/assignment notice and cure schedule are now either agreed or contested — there is no third state after Monday. Dutch Bros remains backup bidder if anything falls through.

Darden — the tenant behind roughly 41% of Four Corners’ portfolio and the closest thing casual dining has to a treasury bond — reports fiscal Q1 2027 next Thursday, September 24, before the open. Consensus sits near $2.05 EPS on about $3.2 billion of revenue, against full-year guidance of $11.10–$11.35. After Signet and Macy’s beat on cost and mix while the low end traded down, Darden is the cleanest read on whether the middle-income diner — the one paying $4.37 at the pump — is still showing up at Olive Garden. The value-menu commentary will matter more than the print.

On the calendar: Car-Mart waiver expires Friday, September 18 (today). Salad and Go sale hearing Monday, September 21 — also Car-Mart’s first milestone date under the original waiver schedule. Darden reports Thursday, September 24. OZ 2.0 state nomination window closes Monday, September 28, with a single 30-day extension available to October 28; new zones take effect January 1, 2027. Next FOMC: October 28.

That is how far below the risk-free rate a buyer at the tight end of Boulder’s Chick-fil-A ground-lease range (4.15%) is accepting on day one, with the 10-Year Treasury at 5.02%. Even at the midpoint of the range, the spread is roughly negative 70.

Sit with what a negative spread means, because the market has not seen one this wide in the modern net-lease era. The Treasury buyer gets 5.02%, daily liquidity, and zero credit work. The ground-lease buyer gets 4.15%, an illiquid asset, transaction costs in the points, and — because a ground lease is land — not even the depreciation shield that flatters most net-lease after-tax math. Every classical component of a cap rate says this price is wrong. So why does it clear? Three rational-ish reasons, in descending order of respectability: the rent bumps (a 10% bump every five years adds real growth a Treasury never will); the residual (the improvements revert to the landowner, and the corner under a Chick-fil-A is usually the best corner in the trade area); and the 1031 clock (a seller with a large embedded gain isn’t comparing 4.15% to 5.02% — they’re comparing 4.15% tax-deferred to roughly 3.5% after paying the tax man, which is why exchange capital is structurally price-insensitive). Each is real. None is unlimited. The bumps are contractual but the residual is a forecast, and the 1031 bid is a function of other assets selling — in a 5% world, fewer do. The dot plot says 16 of 18 Fed officials expect the risk-free alternative to pay even more by December. A negative spread is a bet that every one of those three stories outruns the Treasury. Know which story you’re buying — because at these prices, you are buying a story, not a yield.

Munger’s answer, when asked how he and Buffett valued businesses, was that intelligent people make decisions based on opportunity cost — everything is measured against your next-best available alternative, and for most capital most of the time, that alternative is the boring one. He liked to say his family’s fortune was built not on brilliant choices but on comparing every idea to the best idea already on the table.

This week the boring alternative repriced. At a 5% 10-Year, every asset in net lease — every asset in capitalism — is being silently re-marked against a security you can buy in thirty seconds with no tenant, no roof, and no lawyer. The discipline of opportunity cost is not “is this a good deal?” but “is this better than the Treasury, by enough, for the risk?” Run the week’s ledger through that single question. A Dutch Bros at 5.20%: twenty basis points over, for franchise-concept risk and a 500-square-foot box. A Chick-fil-A ground lease at 4.15%: minus eighty-seven, for bumps, dirt, and a deferral. An Applebee’s at 7.30%: plus two-thirty, for the privilege of guessing casual dining’s next decade. None of these is automatically wrong — opportunity cost is a hurdle, not a verdict — but each now has to argue, and the argument must be specific: name the bumps, price the residual, discount the tax motive by the odds you actually hold to term. The sellers’ argument, meanwhile, is the lag: today’s asking cap rates were set in a 4.5% world, and next spring’s will be set in this one. The most expensive sentence in this business over the next two quarters will be “we’re still seeing deals get done at these levels.” So is Silver Point, in seven-day increments — and that is opportunity cost too: a lender comparing one more week of a borrower’s life against the recovery value of walking. When the risk-free rate is 5%, patience itself has a coupon. Charge for yours.

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.

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