Season 4 Episode 7: M&A Perspectives for Q3 2022



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Welcome to The Restaurant Boiler Room, season four, episode seven. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the boiler room, I'll be giving some deeper perspectives on the M&A environment from our Q2 lender survey across the franchise lending space. I'll also talk about deal cyclicality during any calendar year and address some real estate valuation considerations in a slowing deal market. The Restaurant Boiler Room is a one-stop shop for multimillion dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations and risk delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on a monthly basis. Feel free to find our content at Unbridled Capital's website at Now, let's enter the boiler room.

Well, here we are. I just came back from a little vacation. I thought I might share with you, guys and gals. It's always been a bucket list. I mean, do you have a bucket list of a trip you've always wanted to go on? Small kid who grew up, me in small town Kentucky. Actually, when I was in my early... I was 10 years old or so, we lived in near Kentucky Lake and Lake Barkley in the Western part of Kentucky. And for people who've been down to that area, you'll know it's an enormous manmade lakes by TVA back in, I guess, the 1960s maybe. It's just this little microcosm of people who like to be on the water down there because it's just so beautiful in the middle of nowhere in Western Kentucky. So I grew up loving the water and ever since I was a kid, I kind of... Well, I don't know about a kid, maybe in my early 20s, I've wanted to go on a trip, a catamaran, a sailing trip down in the British Virgin Islands.

Maybe you guys have seen some of these things on TV or whatever or have some friends who've been on a trip like this, but we piled five couples. Fortunately, three of them were doctors. So if I was going to get hurt, that had kind of built in people to help, but we had five couples and we piled into a 50-foot catamaran and went down to the British Virgin Islands for a week. And man, what an adventure. Oh, my goodness. We kind of did about, I don't know, somewhere between three to five hours a day maybe of sailing. And then the rest of the time kind of just went and explored the area, and it was kind of the trip of a lifetime. My wife got a little bit sick, a few days with some of the big trade winds and some of the big waves, but it was a heck of a week, and so I'd encourage it.

If you have a wild hair to do it, reach out to me, and I'll tell you about the experience, but the cool thing was I'm sitting here one day, man, in this place called The Baths, which is evidently only in the Maldives and in the British Virgin Islands. So they have this exact kind of rock formation, so it looks like God sprinkled a bunch of gravel in the middle of the water. And you have these big boulders kind of piling on top of each other, and they form this kind of neat little maze of water and caves and things like this, and so we're sitting there hiking through it. It takes like 45 minutes to get through it, man. It's just really neat.

And on the other side, I pop out and I run into a Taco Bell franchisee. Can you believe that, man? There were about 20 people on this edge of the island. It's on an island called Virgin Gorda in the British Virgin Islands. There's about 10 of us there, maybe 15, right? I mean, nobody. And my group was 10. So if there's 15, then that means there's only five people, but they were one of five or six people there, it was a Taco Bell franchisee. I won't name him and his wife and they were doing a catamaran as well. And what a small world, man. So I guess the story is always watch your back because you never know who's going to be there, right?

I was told once... There's a long-time guy I've known in the KFC world who is a corporate guy, he's the second or third person in charge of KFC in the '80s, and he was coming back from business trip. And he said there were some guys who were badmouthing KFC in a row in front of him that were going to a KFC corporate headquarters, but they were saying bad things about KFC. And he heard it, sitting right behind him and went promptly over to find out what department they were going to and told them not to buy the products they were selling. So I hope I've learned that lesson. Sometimes I need another knock in the head, but isn't that a crazy story about running into a franchisee basically in the middle of nowhere?

Okay, so a couple of updates for today. One is I just wanted to let you know, I just got selected to be a panelist at the upcoming Restaurant Finance and Development Conference, which is I believe November 14th through 16th in Las Vegas. So if you're going to be there, make sure to check that out. I'll be on a panel with some lenders and some deal makers to just kind of talk about the state of the industry in M&A this year. It's a good convention for those of you who might be listened, who haven't attended. I mean, it's decidedly loaded with lenders and lawyers and brokers and advisors, so you get some really good perspective, a lot of real estate people too, not a ton of franchisees there. There are some, but it's like a deal makers kind of event, but it's a good place to go sink your teeth into the industry for two and a half to three days and get a crash course.

I mean, you leave with your head spinning. There's so much material and content, so I'll be doing that. I look forward to it. I hope to see you out there. We go every year, just part of our deal, and we enjoy it. A quick market update, I've said this before. Back in 2021, it seems like a million years ago now, right? I think our company closed... Unbridled closed 37 deals. And then here we are this year, we've got I think four or five deals closed and we've got 12 deals active that we're hoping it'll close in the next two or three months and four or five others that were going after, kind of puts our deal volume a little bit below half of what it was last year. I've said this several times, a lot of it is not a surprise because of the high push and high pace of 2021 with franchisees selling their companies in an upmarket and wanting to avoid what ended up being a flop.

But we thought at the time, there's going to be enough Democrat votes to maybe turn out the cap gains tax and increased it. And if that was going to happen, a lot of people selling their companies were going to have to pay millions of dollars in extra taxes. So I think that was a catalyst to get things moving in 2021, but 2022 was going to be less just because of the momentum of '21, but obviously in '22 and especially as we've pushed on this year, I think people have not been aware of the changing market conditions as quickly as they've changed. I'm kind of a realist, I mean, a lot of you will know me as an optimist, but I'm really kind of a realist and I'll kind of give you my perspectives on this podcast, but of those kind of four or five deals we're going after one or two of them are now distressed.

I mean, not bankruptcy, but the lender is owed more than the business is worth and there's kind of a restructuring advisor or at least the ownership is looking to sell. And what do you do when you're in that kind of a situation? You've got, obviously, to get the permission and the buy-in from the lender, you have to work with your franchisor if you're behind on your payments. There's a number of things. I think when you talk with folks in the industry, they've been a little slow to see kind of the effects of the high commodity cost increases in the labor situation and then the fall off in traffic at the restaurant level in many brands just because of the high cost of gas.

I mean, I talked to... I mean, I just saw a stat the other day that said... This is directional, right? It's not supposed to be exact, but I'm thinking, I saw a stat that said, this year, that grocery prices are up 6.5% and restaurant prices are up 10%, right? So that gap is starting to become meaningful, especially as gas prices stay persistently high. And I feel really bad because, I mean, I'm in this industry like anyone who's a restaurant franchisee, right? I mean, we tether our future to the restaurant business and things go up and down. So I'm not overly worried about it, but with the cost pressures being so high, franchisees are raising their prices. And at some point, folks just kind of are... You're pushing kind of the price elasticity curve and people don't want to spend the money anymore.

And so I think we're seeing a big fall off in transactions that's being masked a little bit by some of the pricing increases that may be showing some increase in same store sales in brands. But if you dig into it, you're going to see that a lot of the brands are showing transactional declines. And I hope that obviously drops. I mean, that's the reason gas prices are always the culprit when you see transactional drops for this reason. Those kind of things had an impact. They've had an impact this year. I had some guy tell me today that his sales are up 6% year to date, but as EBITDA is down 30%.

There's a couple of firms, large ones that are either publicly traded or their debt is publicly traded. And you can see some pretty... I won't name any companies, but you can see some pretty kind of eye popping EBITDA drops from first and second quarter this year or first and second quarter last year, some of them in the tune of 50% or more. So there's been an adjustment, pricing is always meant to... Or let me say this, most people don't take pricing in advance of cost pressures. They do it in arrears, so it takes a while to catch up.

As a country, I would say, many of you listen to this probably would agree with me, you can't expect to print money when the economy shuts down for six to nine months and not have a comeuppance at some point, right? I mean, if we hadn't had the amount of money that was jolted into the system after COVID, after six months or nine months, six months, whatever you want to say of shutting the economy basically totally down, you would expect a massive recession. And so I'm hopeful that the positive side of this would be that we're just going to be in for some maybe kind of some gentle pain over the next six to 18 months, but it's certain that it could be worse than that.

Is it leveling out in terms of EBITDA decreases? And again, this is brand by brand, geography by geography. I mean, I've heard a couple of guys just today tell me that they're hoping that the pace of increase of commodity costs will basically stop in the August, September timeframe. Now, that's one guy who told me that. He still says the labor situation is persistently difficult, but it's improving. And I think it'll be interesting to see what happens if we do get into a recession, if the labor force situation shifts into the employer's favor, and maybe, just maybe, a reset of some kind like a recession is going to be needed to get kind of more of a balance in the labor front between the employer and the employee.

I don't know. I don't know how to assess any of it, but I know that in the short-term, we've all been seen a bit of a draw down this year, especially as interest rates also increase. And so our deal flow as a company is down a little bit. And I think I asked a three or four guys I was on the phone with today what they're seeing in the marketplace. I mean, my company doesn't have a perfect view of what deals are out there across the spectrum of M&A, but I hear consistently from the folks I talked with today, that it's dry as a bone out there. Some of that now, guys and girls, listen, is that it's a little bit cyclical, right? It is normal in the summertime that things slow down a little bit.

Typically, what happens is people come off the end of the year. Usually, they get their year in P&L. Some of them are audited, whenever, all the accruals are made, and they're sitting probably around the end of January, the 1st of February, and then people kind of dust off their financial statements. They look at what happened in the last year, and they make kind of their planning decisions for the following year. And so typically in the February, April, and March timeframeM&A firms like ours are typically really busy getting new assignments, right? And then you're kind of closing some assignments that lingered past the previous year end on December 31st. And then usually, you're really busy up to May, and then you usually spend the summertime... There are new assignments that come on board.

I mean, I'm talking over a 20-year window here, so every year could be different, but usually, you're kind of working on due diligence across the number of deals during the summertime. And the new transactions coming to the market are somewhat slow in the summer. And it just kind of sort of usually happens to be that way. Then in the early fall, usually August is a really slow month. And then you get into September, October, conventions start to happen again, and people start to think about selling their companies. They start talking. They start seeing their neighboring franchisees. Usually, they've gone through the first half of the years, covenant compliance with their lenders. And so there's usually a little kick up in business and new activity in the fall and the early fall, and then in the late fall as well, usually around November, and then it slows down, new assignments into November and December.

So that's kind of the pacing and sequencing in cyclicality of our business. So I think summer's generally slow. So I'm not sure whether I interpret the slowdown right now as being due to economic conditions and due to EBITDA dropping, certainly some of it is that way, but I'm not sure how much of it is just the natural, normal summer cyclicality of the slowdown of M&A. So keep in touch and keep attuned to everything. I got a cool little webinar, switching gears here, coming next month in August, and we're going to be talking... I want to take a deep dive into real estate, and I just wrote down some... I'm going to have two people to interview him and talk to him, and so you won't want to miss that.

One is going to be Chelsea Mandel, who's the co-founder of Ascension, which is a real estate investment, not a real estate investment, but mostly a sale-leaseback company out of New York and California. They're really good. And so they're going to have a perspective on the sale-leaseback market. And then I'm going to invite in Josh Lewis of National Retail Properties, who's a direct real estate buyer. Their company is a publicly traded REIT, and they buy a lot of real estate. They bought a lot of real estate on deals that we've done, especially in the KFC world, and they're going to talk... Josh going to give his perspective as a direct buyer of real estate and what's going on.

And so kind of wrote down some questions and some of these are going to be... I'll talk just today about a few of them, but I'm going to ask them for a macroeconomic update and what's changed in the real estate market with buyers and sellers during this past year. My sense is that the cap rates have stayed sideways. We're starting to hear of buyers, real estate buyers, retrading deals a little bit during due diligence or forcing kind of cash terms or quicker terms on closing to the real estate sellers. So I feel like there is a little bit of evidence of that in a couple of our deals. I do think we're seeing a movement of maybe 25 basis points or so of worse cap rates.

And this is a question I'll have for the duo when we get on the webinar, but because there's so much cash in real estate deals, especially small real estate deals, it takes a while for the market to adjust to interest rate increases. So while cap rates generally move in the same direction as interest rates, there's usually a delay there because of all the cash that's involved in the offers that are currently underway. And then the locking of interest rates with people who are buying and selling the real estate, so I think we're going to see cap rates change a little bit in the upcoming months, a little bit more than they have, since we've had, and we'll continue, I think, to have continued interest rate increases. So we'll talk a little bit about that.

I want to dig really deeply into the terms of due diligence and how those are changing, whether buyers are now being able to force sellers into stronger personal guarantees, whether they're more keen on buying real estate at a lower price per square foot, which was always an issue because some of these restaurant companies might be sitting on a tiny lot that does two million in sales and the real estate value at an 8% rent, five cap rate. I mean, just throwing it out there. It's like $3.8 million or something like that. And if you divide that by the square foot of the lot, you get this astronomical number, so you kind of get... Some of the buyers get the heebie-jeebies based on price per square foot, even if the rental factor and the cap rate are reasonable, so want to dig into that a little bit.

What kind of concessions are sellers of real estate having to make as they get into due diligence right now? We did have a little bit of worry in the 1031 market about it changing, maybe going away, maybe shifting a little bit, maybe cap gains not being able to be deferred. And so while it looks at the moment that we're not going to have much economic change to the tax situation again this week, I think Manson came back and is saying no to some of the proposed changes in tax legislation. Again, I think that's something we'll dig into, and I think we want to talk about financing real estate.

So typically, when you're financing business loans on the M&A side, or just the OpCo they call it, operating company, those can be, typically speaking, 10 to 12-year amortizations with five to seven-year terms, and you can fix those rates. But typically, what's happened in the past in a muted interest rate environment is someone will take a loan with a five-year term in a 10 to 12-year amortization, and then they will refinance it after five years when it comes due. But on the real estate side, it's a little bit different. Real estate investing, a lot of the real estate people are looking for 20 to 25 year amortizations and fixed interest rates in terms that coincide with amortization, right? So they can lay out their cash flows and the rental payments, so we'll dig into that a little bit.

Geography's going to have a role to play here in terms of cap rates. Brand will also have a role to play in cap rates. I mean, it is true that like a Pizza Hut dine-in asset is going to have a cap rate that's way worse than a Taco Bell kind of asset because the nature of Pizza Hut dine-in assets are kind of going away, right? For those of you who listen, you know that, and just driving your main street USA and you see that kind of the dine-in assets in Pizza Hut are largely getting converted and relocated into delivery restaurants. And it leaves some of the dine-in assets are really cranking it still and doing well, but the cap rights in the marketplace are reflective of that transition, and you have that across all kinds of different brands.

Next time, I hope you'll enjoy that. And now, let me dig a little bit into this lender survey. One of the problems I had last time... I think you going to laugh out of it if you listen to the last podcast, right? It was like I had Mike Eagan and John Dysart. Yeah, I had these lenders and we were talking and I asked them all these questions, but I didn't get a chance to kind of lay out what the survey results were from the other 22 respondents. The other 22 lenders who voted on the answers that I asked and I do this twice a year. So I'm just going to go through this just a little bit because it wasn't clear. It was funny. There's this ringing noise when I was doing the webinar like Panic at the Disco, right?

So I hurdled the dog out in my living room, ran upstairs, grabbed the iPad and I had all these grand notions of being able to show you guys, who were watching on the webinar, a pie chart of all the answers to these questions with all the respondents, didn't exactly happen that way. So let me go through it a little bit. So there's 15 questions, I'll go kind of quickly over it and just shoot out some other opinions that I have. First one was, what is your opinion of the operating environment right now? Now, you have to remember that lenders see things in arrears. They see things probably three months old because they are looking largely at covenant compliance and bank documents and P&Ls on a quarterly basis in arrears, right?

So you finish your second quarter, let's call that June 30th and then... January, February, March, April May, June. Yeah, June 30th. And then you submit the documents to the bank and they get them like July 15th, right? So they're not going to know what second quarter financials really look like other than anecdotally through talking to guys like us. On the M&A side, we're in front of it like a hawk because we're looking at deals real-time and how much EBITDA is changing. And of course, we're selling these businesses based on the current trailing 12-month financials. So we're uber interested in what's happening today, yesterday and tomorrow, but the lenders are typically behind by as many as four months as little as a month and a half.

Okay, so what's the operating environment at the time? Of the 22 respondents, 36% said difficult but improving. I bet that changes because I bet these results are based on Q1 compliance. When they see Q2, this number will change I think. Difficult and likely to get worse 41%, and then multi-year correction is in the way. It's 14% and normal but a bit challenged is 9%, if that gives you kind of a viewpoint. And again, I think that those are going to shift based on Q2. This survey, a while conducted only a month ago, did not have the benefit of the lender seeing the Q2 compliance. How much is your loan volume dropping because of rising rates? 45% said not much change, 36% said modest drop but should turnaround later this year, and then 18% said modest drop that'll get worse.

What is your opinion of the likelihood of the severity of a recession? This is kind of old, but it said 50% of the lenders, 22 respondents said recession very likely, affects modest and somewhat lingering, and then you had about split down the middle 25% each saying recession very likely with a quick bounce back and then recession possible. No one said recession very likely with long and painful outcomes, so that was interesting I thought and that might change slightly if that was asked today. I think that would be at least a sliver of yes out of 22 respondents, wouldn't you think so too? Okay, how many franchise M&A deals are you personally trying to fund? Of the 21 responses on this one, 52% said zero to three, 38% said four to six, and then the remaining small sliver said more than six basically.

So I think that's consistent with what the marketplace is showing. So if you're a family office or private equity group and you're like, "Man, deal flow is slow," just hear this from me and from the results of this survey to hear that's true. It's true. Deal flow is slow. It's slower. The deal flow may not have slowed as much on the real estate side, but on selling operating companies and franchise businesses, yes. So I think this corroborates that as well and M&A does typically really well, we're a leading indicator. I'd say we're the point of the spear. So typically, what ends up happening is when things are really good, we're really busy. When things are really bad, unfortunate because we don't want things to be really bad. We're typically really busy, M&A advisors, right? When things are getting better, we typically start getting busy.

But when we're in a transition from things we're good to things are getting slightly worse, you typically see that's the time where the breaks are typically put on the advisory work that we do. And my guess is without knowing or having a crystal ball that probably it'll stay this way for the next six to nine months. Again, not knowing what the summer cyclicality is like this year and how much of it is just due to summer and how much of it's due to slowing deal flow. How many of your M&A deals are getting retraded? Of 21 responses, 33% said some, 33% said a few but isolated to a circumstance or a brand. There's a couple brands out there where there's just kind of almost wholesale retrading going on because performance continues to drop. And then 15% said many or most are getting retrained, and then 20% said not many are not more than normal.

I thought that was kind of interesting, so two on that. It's definitely becoming a little bit more of a buyer's market than a seller's market, right? No surprise there. I don't know if you're seeing that on the residential real estate side too, but you certainly are seeing it on the business side. "How many of your deals are falling apart," I asked. And with 21 responses, we had 43% saying a few isolated to the circumstance, 43% saying not many, no change from normal, and then 15% are saying some. And I can tell you that Unbridled, I've always prided ourselves to keeping a 90% success rate of the deals we take. Time will tell at the end of this year, but I think we'll probably drop a little bit from that 90% this year, maybe into the 80s, I'm not sure.

That still means on a base of 15 or 16 deals, we'll close, just a couple of them, right? Maybe three of them won't close. Sometimes percentages can be deceiving, but I do think the environment's conducive to some deals coming off the table and pausing and then coming back and revisiting at a time when it's stronger. And let me pause here for a second, for you, franchisees, that are listening and just want to say, man, be cautious about talking with anybody about the value of your company and making a decision to sell your company based on bad information, only to find out the value in the market is lower than what you thought it was or not consulting someone like me, who could tell you what happens if you're EBITDA lowers as we go into due diligence, what effect that has on the price.

There's a couple of reasons why that's such a big deal. Number one, you do not want to have your business on the market unless you're 90% certain or more that you're going to sell it, right? There are major confidentiality issues with your employees. You don't want to deal with, especially in this type of an environment, all of the people leaving and all of your tenured staff panicking if you sell a company, and then you take it off the market. That's terrible. Number one. Number two, does it impact the relationship with the franchisor if they know that you're going to sell, right? But then you back away, it may change the franchisor's willingness to help you. You have to think through that. I'm not saying that's the case, but it certainly could be the case, right?

And I think the other thing is, and this is underrated, it's like you are a dead meat if you come out to the market, and then you don't sell. And then you come out to the market again and then you don't sell, and then you come out to the market again. You got basically two shots. The first shot, you're clean, man. People go after your business. The second shot, you're going to lose maybe 30, 40, 50% of the people who are looking at it the first time, it's just the nature of the beast. The people who look at it the first time and want to make an offer or looking through it with some due diligence, some of those folks are going to say, "I'm just not interested now. I've got other things. I went through another acquisition," because it is true that people who look at deals for sale are also looking at other deals for sale and they're not only looking at your brand, they're looking at other brands, right?

And if in the interim they decide to go bite off another pizza company and buy it. Well, that means they can't make an offer on your pizza company because it would be a conflict of interest, and they have non-competes with the brand, so that happens. People who are acquisitive, typically keep looking to acquire. And then with the business comes back on the market, they may not be around. But the other reason is it signals to the market that you're not serious, right? And so a lot of people who were interested before may say, "I don't want to fool with this. It was for sale before. It's kind of like dead fish, right? It stinks now." So you got to be very cautious about your timing and your approach, and especially in a bad market or a market that's trending worse, you need to get good advice about what realistically the value of the business will be when you cross the goal line and the deal closes.

Cool? Okay. Next question, has your underwriting gotten tougher? 45% said yes a bit, 36% said yes moderate, and then 18% said no. Again, lenders say that kind of stuff all the time, and the funny lenders want to give money to people who don't need it, but those who want it or need it. Typically, it's harder. So my guess is this answer has changed a little bit too. My guess is you're going to see almost 100% of people saying that their underwriting has gotten tougher now, and it's just because of comps and trends. Like I said, commodity costs, labor inflation, traffic issues, and interest rates. What percentage of your clients currently out of loan covenant compliance and right now, if 85% said 10% or so, 10% of respondents said 10 to 25%, and 10% of respondents said 25 to 35% of my clients are out of loan covenant compliance, but that's based on Q1. I think those numbers will change pretty significantly for Q2.

Which deals are the most likely to get done through your bank? This is always interesting. 42.9%, 43% said tier one smaller deals with low leverage. Now, that's a big, big shift. That's 21 respondents and these are all big national and international banks. So 43% of them when given the choice said tier one brands, the top brands, smaller deal sizes that are based on low leverage. Now, that's a huge departure from what we saw in the marketplace last year in the last five years, where all these mega deals were happening, right? Okay, so 38% said tier one brands, larger deals, higher leverage. Okay, that would be more consistent with the trend for the last five years, but that's only 38% of the respondents, and then 19% of the respondents said tier two, larger, low leverage deals, and that's interesting isn't it?

So those would be brands, think about brands that have less than 3,000 units, maybe the largest franchisee in a mid-tier 1,500 unit system who has low leverage, so those deals may be deals we see in the marketplace in the next 12 months. Certainly the larger, highly leveraged deals. A lot of those have already been done. So maybe we'll see more smaller, low leverage deals in tier one and then larger low leverage deals in tier two. But notice that the trend is low leverage, low leverage deals, low leverage deals, low leverage deals. So that means that if you're listening to this, if you have cash and you're willing to have greater percentage of cash in these deals, you are going to, I think, be... Obviously, it's an obvious comment, but your chance of success in closing a transaction through a national lender is going to be much higher.

Next question, what segment are you most positive on? This is a good one too. 33% said specialty. Huh, interesting. 29% said chicken, 24% said burger and 14% said pizza. Pizza's always kind of lagged because it changes a lot. Pizza changes a lot based on sales. It's a highly commoditized business. I didn't know that I'd find specialty being the answer for 33% of the respondents. I thought that was interesting. What part of the loan process is getting the most scrutiny from your risk department? 53% said interest rate. Well, that's obvious isn't it? Interest rates are shooting through the roof right now. 42% said amortization in terms and the remaining 7% said personal guarantees. So I think it's... So keep in mind, you're going to be looking at interest rate, sensitivity and amortization in term, which it looks like are going to be getting scrutinized a lot at these banks.

So all the more reason to be talking with multiple banks because you're going to, I think, see a departure from everyone standing in line with the same exact product and the same exact approach. You're going to see some variability in the next six to nine months. So you're going to want to shop a little bit to make sure you're getting the best situation. What metric is most important to you right now as a lender? 55% said lease adjusted leverage, 32% said fixed charge coverage ratio, and 13% said straight leverage. It's about what I would've expected, right? We still lease adjusted leverage is the biggest. Typically, you see fixed charge coverage ratios being something that most lenders look at secondarily, some look at primarily, but all really look at it secondarily, and then maybe some of the smaller lenders look at straight leverage, that's a comment.

Least adjusted leverage, what's your expectation of the movement in the next six months? 40% of respondents said 15 to 30 basis points worse or lower, 30% of respondents said 30 to 45 basis points lower, 25% said zero to 15 basis points lower, and then a small percentage, which looks like, let's see, seven to nine, 5%, which is probably just one person, said 45 to 60 basis points lower. The average across this is probably 30 to 40 basis points, right? So what that means is that banks are gearing up to be lending less money on deals is what that means because they're going to manage the overall proceeds that they'll give a borrower based on a lease adjusted leverage. And if that's dropping and it sounds like it will be in the eyes of almost all of these lenders, then you can expect the proceeds to drop in the amount of equity to increase, which means you're either going to have to put higher down payment, reducing your returns or the price has got to drop, A or B.

Where do you see rates setting in the next six to nine months? 50% said 50 to 100 points basis points higher from here, 32% said 100 to 200 basis points higher from here, 14% said zero to 50 basis points higher from here. That's definitely a fluid situation. So I guess in closing, I'll continue to do these lender surveys twice a year. Stay tuned at the end of Q4 or the middle of Q4, we'll do another one. I think it's really helpful to do that. We'll be doing a webinar again next time, talking about real estate. And I think I'm going to do that twice a year too because the cap rate and the real estate valuation considerations change so quickly in this market. I mean, my goodness. I've been doing this for over 20 years, I didn't think it was going to change by the minute, right?

We usually thought of things that changed by the year or by six months, but now, I think the importance of getting new information forward to you guys sooner is good. We'll continue to kind of build into getting a couple large operators I'm going to talk to and get their perspective, every couple of months or so on these podcasts. I think that's helpful, so that's upcoming too. I like to tackle legal challenges too and asset purchase agreement changes and things like this that you can really sink your teeth into when you're negotiating a deal. We'll do that as well, upcoming. And then we, of course, will have twice a year. I'll get on with my team and we'll just talk about the M&A market and what we're seeing that's changing in the M&A market. So stay tuned. Thanks so much for listening. And we'll catch up with you next time. And get to the British Virgin Islands, and you never know who you're going to run into. Take care.

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