John DeCree: Yes, absolutely. Thanks John. Thanks everyone.
John Payne: Thank you, John.
Operator: We now turn to Haendel St. Juste with Mizuho. Your line is open.
Haendel St. Juste: Hi, there. Good morning. Thanks for taking my question. I wanted to follow up on the questions on Bowlero, but more from me how you’re thinking about value creation and capital allocation and risk holistically in the current environment. In the past, you talked about seeking a minimum 100, 150 basis points spread as an investment hurdle. I guess I’m curious if that’s still the case in today’s environment, or would you perhaps want to seek more?
David Kieske: Haendel, it’s David. Good to talk to you. No, that is absolutely still the case in this environment. And as we talked about, obviously, we were fortunate to raise the capital this for the Bowlero transaction, specifically earlier in the year when, in fact, the Bowlero was in our pipeline back then things take weeks, months and time to come together. But we’re not — is not in the sand as we sit here today. If we look at the screen, see where the tenure is. We obviously see where our stock price is and still are on generating those types of 100 to 150 basis point spreads to our cost of capital. As we think about it, we think about the next dollar of cost of capital, where do we need to price something make it accretive based on the market that we are in and underwriting at that time and the capital that we have available to us.
Edward Pitoniak: I’ll just add, Haendel. We’ve had a few questions along the lines of, well, geez, could you have used that money to buy 9 and 10 cap assets? And our answer to that would be today and especially during the period in which you were gestating the Bowlero deal, we don’t see any really good real estate occupied by really good operators trading at 9 and 10 caps right now. The day could come when they do, but that day is not here right now. And in the meantime, with this capital volatility that we see, we will be very, very careful in recognizing that not only is the cost of capital volatile on a day-by-day basis, that has implications for any deals that have long gestation periods. So we will have to particularly take care any kind of deal making that requires longer gestation periods to account for the fact we do not have capital cost certainty by any means, and won’t necessarily have it until the day we decide to do a deal, which means we will take great care in deciding to do anything against these market conditions.
Haendel St. Juste: Got it. Got it understood. And one more something else that was unique about Bowlero. It marked the first direct equity ownership in nongaming real estate on your part. I guess I’m curious if that’s something you can expect more of going forward? And I know that deal is still a relatively small piece of ABR, about 1%, but you do have a ROFO for eight years. So curious how do you see there with either that partner and/or within that space going forward. Thanks.
Edward Pitoniak: Yes. So you’re right. Technically, that — these do represent our first direct investments, immediate ownership of nongaming real estate. What we should point out, of course, is that through our ventures with Cabot and Canyon Ranch, we have contracted for call rights that give us a direct path to real estate ownership in the future. So it happens to just be a difference between the nature of our acquisition of real estate potential acquisition of real estate with Cabot and Canyon’s Ranch versus the immediate acquisition with Bowlero. And certainly, in this case, you had an operator with a very compelling opportunity to grow, a very compelling opportunity to put sale-leaseback capital to work, which led to our immediate acquisition of the real estate itself.
Haendel St. Juste: Thank you.
Operator: Our next question comes from Ron Kamdem with Morgan Stanley. Your line is open.
Ronald Kamdem: Hi. Just two quick ones for me. Just going back to sort of the Bowlero transaction, and I appreciate all the details that you provided there in the partnership and so forth. But as you’re thinking about sort of the family entertainment sort of space, Bowling is sort of an interesting one. Maybe a little bit more color on how the deal came about and what other sort of avenues or verticals and family entertainment that you entertain?
Edward Pitoniak: Yes. I’ll turn it over to John in a moment, Ron, and good to hear from you. I do think one of the key characteristics of bowling is that it is a low barrier to entry experience, but it is an experience that you can get better at. And that’s in contrast to some other experiences that can take place within the family entertainment sector, where people might do it once or twice, and they go, okay, fun. I’ve done that. I don’t need to do it again. And Boeing is at its very heart recreation. And if you want to get philosophical about it, you can say, it goes back to our most ancient human urges to aim at a target and strike a target. And people tend to get pretty excited when they strike targets. And that energy exists within bowling.
It’s a recreational energy and not a passive energy. So we think that, that has resiliency aspects to it that are at the heart of why bowling has endured in various warrants for literally hundreds and hundreds of years, whether outdoor on lands or indoors and buildings. But I’ll now turn it over to John, who can give you more color on how we develop that relationship. John?
John Payne: Yes, Ron, I was just going to add that you’ve heard me speak about times that relationships take time. And this is one that I think I looked at my notes in my first meeting was years ago with one of the top executives at Bowlero. And we just studied the business for this long. It’s got scale. It’s got healthy credit — it’s a business that has great margin with growth potential. The one other thing I’ll add to Ed’s remarks, as we continue to study the Bowlero business was the diversification of its revenue streams. It has many cash registers how the business can get into the consumer’s wallet. It gets revenues from food and beverage. It gets a large percentage from bowling, it gets business revenues from amusement.
So we like that diversification as we dug into the business and dug into the team. So we really took time years in this case to understand the business. And then I think your final part was are there other operators over time that we could buy real estate and be partners with. And we’re going to continue to study the family entertainment center space. They’re many good operators, but we think we started our journey in the family entertainment center with one of the best.
Ronald Kamdem: Great. And then just — my second one was just staying on the pipeline of deals and so forth. So obviously, the tenure is much higher than I think most anticipated. And I’m just wondering, like when that happens, like how does that pipeline sort of evolve? Like do conversations stop? Do they pick up? Just trying to understand like what — how is that pipeline evolving and conversations that you’re having as PPR repricing capital?
Edward Pitoniak: Yes, I’ll start and then John and David can weigh in, but they definitely slow down, right? And anybody who doesn’t slow conversations down against this backdrop of volatility clearly is not paying attention. A slowdown in terms of actual coming to any kind of fixing of value and price given the volatility of capital, but I want to turn it over to John because what we don’t want to do is ever put all pens down — not all pen out, but stop all conversations because there will come a day, as I said in my opening remarks, Ron, there will come a day when we begin to recover, and we don’t want to have to call people and say, hey, you probably forgot about us because we haven’t talked in months, quarters, years, what have you. We don’t want to do that. So John, if you want to talk about the way in which we make sure our conversations continue even if they have to slow down a bit in terms of fixing value.
John Payne: Yes. Ed, you described it very well. We’re constantly looking for opportunities to have conversations, learn more about certain sectors and businesses that we’re not experts on today, develop long-term partnerships. But that doesn’t mean we transact at this moment of uncertainty. It means that we’re preparing for the time when they hopefully go from defense to offense and look at opportunities that we understand the sector of the company and we develop that relationship. So a little bit of a different time than the past couple of years, but we still are working to find opportunities for the long term.
Ronald Kamdem: Great. That’s it for me. Thanks so much.
John Payne: Thank you, Ron.
Operator: Our next question comes from David Katz with Jefferies. Your line is open.
David Katz: Hi, morning everyone. Thanks for taking my question. Just one more on Bowlero and this is not intended to be a leading question in any way, but I know you do a lot of homework around the business and the underlying real estate. I wonder if you could just talk about the durability of that real estate value, what kind of it requires relative to the other stuff that you’ve acquired so far? And just sort of give us a picture of that long-term value durability, please?
David Kieske: Yes, David, it’s David. Good to talk. I can start, and John, chime in. I mean one of the things we love about the Bowlero business model is the fact that they go in and reposition bowling outs that have been around not for hundreds of years like Ed talked about, but these assets are 10- to 50-plus years old that they buy and reposition with anywhere from $3 million to $5 million of capital and transform something that was dark and gray and a little bit dated into a very lively experience that, as John talked about, has multiple cash registers and as a draw for the local community. And they’ve done this now since the late ’90s, and they have a portfolio of 350 assets across the country and some outside of the U.S., where they continue to see opportunity to grow in white space out there, a very fragmented mom-and-pop ownership industry, they see opportunities for another 500 to 1,000 centers into their portfolio over time.
