Business Context and Reporting Period
This Form 8-K, dated February 7, 2020, reports the completion of the "Internalization" of Broadstone Net Lease, Inc. (the "Company"). The transaction involved the acquisition of 100% of Broadstone Real Estate, LLC (the "Manager") and the termination of external asset and property management agreements. The Company also entered into a new $60 million term loan facility and executed amended employment agreements for senior executives.
Key Financial Metrics and Transaction Details
- Transaction Consideration: The aggregate value of the Internalization was approximately $209.5 million, consisting of approximately 780,893 shares of Common Stock, 1,319,513 OP Units, and $31 million in cash.
- Debt Assumption: The Company assumed approximately $90.5 million of debt from the Manager.
- New Financing: A $60 million term loan facility was secured from JPMorgan Chase Bank, N.A., maturing on February 7, 2022. Interest rates are based on LIBOR or Base Rate plus an applicable margin (0.85% to 1.65% for LIBOR; 0.00% to 0.65% for Base Rate).
- Guarantees: The Company provided an unconditional guarantee for the term loan. Amy L. Tait and Broadstone Ventures, LLC provided an additional limited guarantee capped at $60 million.
- Stock Repurchase: Prior to the merger, the Company repurchased all outstanding shares held by the Manager at $85.00 per share for approximately $20 million.
- Executive Compensation: Senior executives received amended employment agreements with base salaries ranging from $375,000 to $625,000 and target annual bonuses of 100% to 120% of base salary. Long-term incentive awards have target grant values of $700,000 to $2,000,000.
Material Changes and Covenants
The Internalization resulted in the termination of the Second Amended and Restated Asset Management Agreement and the Third Amended and Restated Property Management Agreement. Approximately 69 employees of the Manager became employees of a BNL OP subsidiary.
The new Term Loan Agreement imposes the following financial covenants:
- Maximum leverage ratio: 0.60:1.00 (with an option to increase to 0.65:1.00 for up to three quarters following a material acquisition).
- Maximum secured indebtedness ratio: 0.40:1.00.
- Minimum unencumbered coverage ratio: 1.75:1.00.
- Minimum fixed charge coverage ratio: 1.50:1.00.
- Maximum ratio of total unsecured indebtedness to total unencumbered eligible property value: 0.60:1.00.
Outlook, Risks, and Contingencies
- Earnout Consideration: Up to $75 million in additional consideration is payable to former owners of the Manager in four tranches ($10M, $15M, $25M, $25M) if specific milestones regarding stock price or adjusted funds from operations per share are met post-IPO.
- Tax Protection: A Tax Protection Agreement was entered into with a maximum liability cap of $10 million to indemnify certain parties against income tax liabilities related to the Internalization.
- Redemption Rights: If an IPO is not completed by December 31, 2020, former owners of the Manager holding OP Units will be granted redemption rights between January 1, 2021, and December 31, 2021.
- Registration Rights: The Company agreed to file a shelf registration statement within 180 days of an IPO for the Tait Family Members and Trident Holders.
- Financial Statements: Pro forma financial information and financial statements of the acquired business are not included in this filing and will be filed within 71 days.
Investor Verification Checklist
- Verify the pro forma financial impact of the $90.5 million debt assumption and the new $60 million term loan on the Company's leverage ratios.
- Review the specific milestones required to trigger the $75 million earnout payment.
- Confirm the timeline and likelihood of the Company's initial public offering (IPO) to assess the redemption rights for OP Unit holders.
- Examine the Tax Protection Agreement to understand the specific scenarios triggering the $10 million liability cap.
- Monitor the Company's ability to meet the new fixed charge coverage and unencumbered coverage ratios under the Term Loan Agreement.