Stephen Horn: Yes. As far as the underwriting, we’ve been doing split funded for a decade. We were one of the first movers in the REIT industry to do it where we use the current relationship, primarily our tenants that they’ll identify the site. And NNN essentially acts like a bank. We’re not taking the risk of development. We like the split-funded deals because there’s no developer profit in them. So the tenants and NNN’s interest are aligned to keep rent low. So that’s one part we’d like. Historically, we always had kind of a 50, 75 basis point spread over the market. And then in recent times, that spread compressed. But we’re still seeing kind of a 20, 30 basis point spread due to split funded. Again, the rent is typically lower because there’s no profit baked in. It’s not a developer lease. It’s an NNN form lease. So there’s a lot of risk mitigation that goes into those deals.
Kevin Habicht: Yes. And just a side note on that, these are relatively simple, smaller projects in the scheme of things. And so these are — these projects don’t go on for years. These are measured in months typically. And so they get developed pretty quickly. And so the pricing that we said on that, we’re very comfortable kind of holding that during the construction period, if you will.
Stephen Horn: And one of the mitigants we do in those leases, if they do drag on for some unknown reason, we have — as we say, we’ve got to close the window and rent has to commence if the building is complete or not.
Kevin Habicht: Yes. And related to your question because — and I’m going to — I want to broaden back the lens a little bit, just because I think the thought was that the more stressed tenants get under, the higher the cap rate. It might be an opportunity for higher cap rates for acquisitions. And while there’s an element of that is true, for us, raising the cap rate is not a great way to solve a risk problem in our opinion. That tends to only make the risk greater, meaning the cap rate is higher, which means the rent is higher, which means the tenant is less likely to succeed at that location. And so we’ve not, over the years, found increasing the cap rate is a good way to address risk. And for us, what would be a better approach and what we prefer and push to do is to reduce the proceeds invested in a property and not increase the cap rate materially.
And so that’s the way we go at it. We think that way, you end up with a safer investment. Less proceeds in the property means lower rent. Tenant more likely to succeed. To the extent the tenant doesn’t succeed, more easy — that rent can be replaced more easily by the next tenant, whoever that might be. And so we just go at it a little differently. So when we see risk out there, we don’t run to raise cap rate as a mitigant, if you will. We don’t think — that works in the short run, I’m sure, but we don’t think that’s a great long-term approach.
Operator: Thank you. Our next question is coming from Spenser Allaway with Green Street.
Spenser Allaway: Maybe just following up on those cap rate questions. Just curious now that we’ve moved into 3Q, has anything changed in terms of pricing either by credit or retail industry now that we’re somewhat through this quarter?
Stephen Horn: So kind of what I mentioned in the prepared remarks, we’re kind of seeing that 10 to 20 basis point pricing increase in the third quarter. I’m not expecting it any higher just given the resistance. And primarily, the deal flows for us is coming from the C-store category, auto service primarily. So yes, we’re not seeing any significant increase. But just given the recent Fed rate hike, we deal with sophisticated tenants and they understand the cost of capital is increasing. So we’re able to pass through some of that.
