Elmer Chang: Okay. Great. Thank you.
Pete Mavoides: Thank you.
Operator: Our next question comes from Haendel St. Juste with Mizuho Securities. Please proceed.
Haendel St. Juste: Hey, good morning. I hope you can hear me.
Pete Mavoides: We got you.
Haendel St. Juste: First question is on, I guess there’s a new tenant in your top tenant list here Tidal Wave Auto Spa. So maybe can you spend a moment talking about them, the opportunity to do more with them and your overall exposure to kind of the car wash, car care vertical, which I think is about 15% here and last. That’s it. Thanks.
Pete Mavoides: Yes. So Tidal Wave is a tenant that we’ve been doing business with for a number of years, a number of deals over the years. And they’ve kind of eventually moved into our top 10. It’s about a 200 plus unit chain. It’s currently led by its founder and the company was founded back in 1999. So a well run company. It’s been in business for a long time and we’re happy to have them in our top 10. Generally, as we’ve said in the past, very comfortable with car washes, given the trends in the industry and the stability of the cash flows and the high margins and the solid rent coverage. And that’s why you see it as one of our top industries. The exposure kind of came back a little bit in the last quarter. But we continue to see good opportunities to invest in that space and we like it. So we’ll continue to do so.
Haendel St. Juste: Appreciate that. And then maybe I think you made a comment on your pipeline saying that the cap rates in there suggest that cap rates should be stable near-term. So can you spend a moment or two on talking about the pipeline, what’s in there, any new categories and broadly your expectation for cap rates given the choppiness in the capital market? Thanks.
Pete Mavoides: Yes. As we said on the prepared remarks, the pipeline is full and when you’re running a business that’s nearly a 100% sale leaseback and nearly a 100% follow on business, your forward pipeline is going to look a whole lot like your portfolio and that’s what it looks like, so really nothing new. We’re investing across all our industries and largely with existing relationships. In terms of cap rates, as the commentary around the competitive landscape would suggest they’re remaining stable. And clearly, I think around an eight. As I said on the prepared remarks, we would expect once the market normalizes and competition comes back in a more normalized fashion. We would expect some downward pressure on cap rates. Clearly, if interest rates trend down, we would expect some downward pressure on cap rates. But we’re just not seeing that as we sit here in the first quarter.
Haendel St. Juste: Appreciate that. And maybe on the terms that you’re getting, is they given the lack of alternatives that a lot of these tenants have. You’ve been able to get longer walls, better bumps, I’m curious if you’re able to getting any pushback from any of those folks and could we see those terms get even better near-term? Thanks.
Pete Mavoides: Yes, listen. Every transaction we negotiate is a negotiated transaction. We’ve negotiated deals with these people in the past. So there’s a lease in place and the terms of the prior transaction tend to buy us the new transaction. Our investment team has done a great job of proving the overall terms. I look back in the first quarter of 2022, our average rent escalation was 1.4, and last quarter it was 1.9 and the quarter before that it was 2.0. I would – and really for the whole year, 2.0, 1.9 to 2.0. 1.9. I would not set the expectation that that’s going higher. But we continue to negotiate the best terms that we can from these relationships, and we’ll see what the market bears. I did make, I would point out on the prepared remarks, our weighted average lease term at 14 years is the same as it was a year-ago which would speak to the benefit of the long duration leases that we added this past year, which is a good spot to be.
Haendel St. Juste: Appreciate the color.
Pete Mavoides: Thanks, Haendel.
Operator: Our next question comes from John Massocca with B. Riley Securities. Please proceed.
John Massocca: Good morning.
Pete Mavoides: Good morning, John.
Mark Patten: Good morning, John.
John Massocca: Can we stick on the pipeline? Do you have kind of like a rough number or brackets around the growth size of that today? I know you kind of mentioned it’s full. But just maybe number wise what you’d be thinking?
Pete Mavoides: Yes. Typically, we point people to our eight quarter average as a good indicator of what to expect. And I don’t know that exact number is, but somewhere between 2.50 and 3.
John Massocca: Okay. That’s helpful. And then in terms of volumes, have you seen any maybe reluctance on the part of sale leaseback partners to kind of come to market or close deals, just given some of the interest rate volatility? I mean, essentially, are your partners on the selling of the property side maybe holding out for better cap rates or lower costs of alternative financing?
Mark Patten: Yes. There’s some of that. There’s clearly, overall transaction volume in the single tenant net lease market is down 40%. And I think a lot of that are people not choosing not to transact in the current market environment. But the flip side of that is, these operators are running their businesses and they have the opportunity to grow their footprints by buying smaller competitors or opening new units and rent is a small part of that overall investment decision for them. And they’re aggressively growing and choosing to use us as a capital partner to do that. So while there is muted volume across the board, we still see an ample opportunity set to transact.
John Massocca: Okay. And then maybe in terms of the competitive environment for sale leaseback particularly, I mean, how does that look today? I mean, setting aside kind of the bank financing market or any kind of other types of financing you compete with. I mean, how many competitors are there out there today, roughly and how does that compare to this time last year or maybe even a couple of years ago?
Pete Mavoides: Yes. Listen, I don’t think it’s materially different from where we were a year ago because it feels like the overall capital market environment is about the same, if not improved slightly. But two years ago there was half dozen to 10 kind of new private capital backed buyers who were coming to the market trying to build funds and platforms and by and large, a lot of those guys are kind of not currently investing at the levels that they would’ve hoped. And so that private buyers is greatly diminished. We also on occasion compete with 1031 buyers, people coming in with large exchanges who are looking to place tax deferred capital. And there’s not a lot of people who are generating gains from the sale of real estate assets and that source of capital as large – dried up and not competing.
There’s plenty of public market participants. You guys follow them and know kind of where they are and what their appetites are. And so we certainly see competition here and there. But overall, it’s a diminished level of competition that we’re benefiting from.
John Massocca: Okay. That’s helpful. And that’s it for me. Thank you very much.
Pete Mavoides: Thanks, John. Appreciate it.
Operator: [Operator Instructions] Question comes from Ki Bin Kim with Truist Securities. Your question.
Unidentified Analyst: Hey, good morning. You have Kyle on for Ki Bin. I think on the second quarter call you guys mentioned approximately 90 basis points maybe are on the watch list with more than half of that [data]. So you just provide an update on how that’s trended recently?
Pete Mavoides: Yes. So our current watch list, which, I’ll remind you, we defined as the intersection of credit risk as a B minus or below and coverage risk as 15 or below. It’s currently 70 basis points. So 20 basis points inside of where it was in the second quarter and it’s still 50% theaters.
Unidentified Analyst: Got you. Thank you.
Pete Mavoides: Thank you. Operator, we got any more questions?
Operator: Next question comes from Jim Kammert with Evercore ISI.
James Kammert: Good morning. Thank you. Pete, you and your team have worked with these middle market credits for a long time, obviously, and seems like the business is pretty well set-up with the unit and the parent or entity financial reporting requirements. But what are some of the flashpoint that you monitor or set off sort of warning signs in your mind that something’s – a problem might be afoot with a given credit? I mean, is it when coverage declines from an original three five to two five, or they’ve been – you had to round them up and collect the rent three months in a row tardy. I’m just trying to – I’m curious, what are those – what are some of those markers historically have helped you monitor and proactively kind of engage with those tenants?
Pete Mavoides: Yes. Listen. I think, I wouldn’t even call it an early warning sign. But late payers or guys who aren’t paying timely are certainly top of the list, guys who were late on their rent. I would say generally that tends to be less than a handful of actors. And historically, it’s the same guys that you’re arm wrestling with. But currently that’s not a material amount. But more importantly it’s monitoring the trends at the unit level. Because that’s ultimately our collateral and our first form of payments is solid cash flow at the unit level. One of the reasons we provide such disclosure around where our rents are covered and how they’re covered. But from our analysis, it’s more just tracking trends and anything that’s falling off or below sector averages.
When you have the amount of data that we have for each of these given industries, average sales per site, margin per site, rent, growth per site, sales growth, all of that, trying to see outliers as to performance at the unit and understand that. And to the extent that something arises that’s concerning. Then you’re taking a deeper dive into the corporate credit to understand, if our asset fails as a source of rent payment, how solid is the corporate credit that’s backing that lease and understanding the risk there. And then ultimately, making a sell decision on assets that you don’t think have the durability that you want and expect in the portfolio.
James Kammert: That seems logical. And just one follow-up to that, do you have like substitution rights in your master leases and whatnot? I mean, you said you might obviously for ailing assets maybe look to sell them. But do you have other protections where you could either add other collateral or maybe work with the retailer to put a performing asset in and take less performing asset out?
Pete Mavoides: Yes. Many of our leases do have substitution rights, where the tenant would be incented to take and exit a sub performing asset and substitute it in. I would say more importantly it’s really just having good relationships and working with these tenants because our interests are aligned and not keeping a site that doesn’t work online and operating. So we may re-tenant a site and the tenant makes us whole for the contract rent that was in a lease and the delta between that and the underlying subtenant rent. So there’s a lot of ways to work through it. I would say one of the benefits of being as granular as we are at the asset level, it’s pretty easy and painless to work through individual site level issues.
James Kammert: Great. Appreciate the update. Thank you.
Pete Mavoides: Great. Thank you.
Operator: No further questions at this time. I would now like to turn the floor back over to Pete Mavoides for closing comments.
Pete Mavoides: Great. Well, Nate, we’re sorry we didn’t get your question in. If you want to follow-up with Mark or Rob, afterwards we’d gladly kind of answer any questions that you might have had, but generally congrats to the team for an excellent quarter, an excellent year. We feel pretty proud about the results we posted last year and we’re excited about this year. We’re off to a great start. So thank you all for your participation today. We look forward to engaging with you all at the upcoming conferences and have a great weekend. Thank you, guys.
Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
